Manor Care, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2006
OR
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission file number: 1-10858
Manor Care, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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34-1687107
(IRS Employer
Identification No.) |
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333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
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43604-2617
(Zip Code) |
Registrant’s telephone number, including area code: (419) 252-5500
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange
on which registered |
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| Common Stock, $.01 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Based on the closing price of $46.92 per share on June 30, 2006, the aggregate market value of the
registrant’s voting and non-voting common equity held by non-affiliates was $3,351,889,587. Solely
for purposes of this computation, the registrant’s directors and executive officers have been
deemed to be affiliates. Such treatment is not intended to be, and should not be construed to be,
an admission by the registrant or such directors and officers that all of such persons are
“affiliates,” as that term is defined under the Securities Exchange Act of 1934.
The number of shares of Common Stock, $.01 par value, of
Manor Care, Inc. outstanding as of January 31, 2007 was 72,875,542.
Documents Incorporated By Reference
The following document is incorporated by reference in the Part indicated:
We incorporate by reference specific portions of the registrant’s Proxy Statement for the
Annual Meeting of Stockholders to be held May 8, 2007 in Part III.
Manor Care, Inc.
Form 10-K
Table of Contents
1
PART I
Item 1. Business
General Development of Business
Manor Care, Inc., which we also refer to as Manor Care and HCR Manor Care, provides a range of
health care services, including skilled nursing care, assisted living, post-acute medical and
rehabilitation care, hospice care, home health care and rehabilitation therapy. The most
significant portion of our business relates to long-term care, including skilled nursing care and
assisted living. Our other segment is hospice and home health care. We provide greater detail
about the revenues of certain health care services and other segment information in Notes 4 and 16
to the consolidated financial statements.
Corporate Headquarters
Manor Care, Inc.
333 N. Summit Street
Toledo, Ohio 43604-2617
Mailing address:
P.O. Box 10086
Toledo, Ohio 43699-0086
Phone: (419) 252-5500
Internet Website: www.hcr-manorcare.com
E-mail: info@hcr-manorcare.com
Securities and Exchange Commission
Our filings with the Securities and Exchange Commission, or SEC, are available free of charge
through our website with a hyperlink to the SEC’s website as soon as reasonably practicable after
such material is electronically filed with or furnished to the SEC.
Certifications
The certifications of the Chief Executive Officer and Chief Financial Officer of Manor Care, Inc.
required by Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as Exhibits 31.1 and
31.2, respectively, to this Form 10-K for the year ended December 31, 2006.
The certification of the Chief Executive Officer required by the New York Stock Exchange Listed
Company Manual, Section 303A.12(a), relating to Manor Care, Inc.’s compliance with the New York
Stock Exchange corporate governance listing standards, was submitted to the New York Stock Exchange
on June 7, 2006, without qualification.
2
Narrative Description of Business
Long-Term Care Services
We are a leading owner and operator of long-term care centers in the United States, with the
majority of our facilities operating under the respected Heartland, ManorCare Health Services and
Arden Courts names. On December 31, 2006, we operated 278 skilled nursing facilities and 65
assisted living facilities in 30 states, with 62 percent of our facilities located in Florida,
Illinois, Michigan, Ohio and Pennsylvania.
Skilled Nursing Centers. Our facilities use interdisciplinary teams of experienced medical
professionals to provide services prescribed by physicians. These teams include registered nurses,
licensed practical nurses and certified nursing assistants, who provide comprehensive,
individualized nursing care around the clock. We design “Quality of Life” programs to give the
highest practicable level of functional independence to patients. Licensed therapists provide
physical, speech, respiratory and occupational therapy for patients recovering from strokes, heart
attacks, orthopedic conditions, or other illnesses, injuries or disabilities. In addition, the
centers provide quality nutrition services, social services, activities, and housekeeping and
laundry services.
Assisted Living Services. We have a number of stand-alone assisted living centers as well as
units within some of our skilled nursing centers dedicated to providing personal care services and
assistance with general activities of daily living such as dressing, bathing, meal preparation and
medication management. We use a comprehensive resident assessment to help determine the
appropriate package of services desired or required by each resident. Our assisted living staff
encourages residents to socialize and participate in a broad spectrum of activities.
Post-Acute Medical and Rehabilitation Care. Our leadership in post-acute programs designed to
shorten or eliminate hospital stays exemplifies our commitment to reducing the cost of quality
health care. Working closely with patients, families and insurers, interdisciplinary teams of
experienced medical professionals develop comprehensive, individualized patient care plans that
target the essential medical, functional and discharge planning objectives. With a primary goal of
a return to home or a similar environment, we provide medical and rehabilitation programs for
patients recovering from major surgery; severe injury; or serious cardiovascular, respiratory,
infectious, endocrine or neurological illnesses.
Alzheimer’s Care. As an industry leader in Alzheimer’s care, we provide innovative services
and facilities to care for Alzheimer’s patients in early, middle and advanced stages of the
disease. Trained staffs provide specialized care and programming for persons with
Alzheimer’s or related disorders in freestanding Arden Courts facilities and in dedicated units
within many of our skilled nursing centers.
3
Hospice and Home Health Care
Our hospice and home health business specializes in all levels of hospice care, home health and
rehabilitation therapy, through 116 offices in 25 states. In addition, we operated nine inpatient
hospice facilities at December 31, 2006. Our hospice services focus on the physical, spiritual and
psychosocial needs of individuals facing a life-limiting illness. Palliative and clinical care,
education, counseling and other resources take into consideration not only the needs of patients,
but the needs of family members, as well. Our home health care is designed to assist those who
wish to stay at home or in assisted living residences but still require some degree of medical care
or assistance with daily activities. For skilled care, our registered and licensed practical
nurses and therapy professionals can provide services such as wound care and dressing changes;
infusion therapy; cardiac rehabilitation; and physical, occupational and speech therapies. In
addition, our home health aides can assist with daily activities such as personal hygiene,
assistance with walking and getting in and out of bed, medication management, light housekeeping
and generally maintaining a safe environment.
Other Health Care Services
In addition to the rehabilitation provided in each of our skilled nursing centers, we provide
rehabilitation therapy in our 92 outpatient therapy clinics and at work sites, schools, hospitals
and other health care settings. Our outpatient rehabilitation therapy business primarily performs
services in Midwestern and Mid-Atlantic states, Texas and Florida.
Other Services
In the fourth quarter of 2006, we sold our medical transcription company, whose business was
converting medical dictation into electronically formatted patient records. Health care providers
use the records in connection with patient care and other administrative purposes.
Customers
No individual customer or related group of customers accounts for a significant portion of our
revenues. We do not expect that the loss of a single customer or group of related customers would
have a material adverse effect.
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Certain classes of patients rely on a common source of funds to pay the cost of their care. The
following table reflects the allocation of revenue sources among Medicare, Medicaid, and private
pay and other sources for the last three years for services related to skilled nursing, assisted
living and rehabilitation operations.
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2006 |
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2005 |
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2004 |
Medicare |
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39 |
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39 |
% |
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36 |
% |
Private pay and other |
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33 |
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32 |
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33 |
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Medicaid |
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28 |
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29 |
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31 |
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100 |
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100 |
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100 |
% |
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Medicare is a health insurance program for the aged and certain other chronically disabled
individuals, operated by the federal government. Medicaid is a medical assistance program for the
indigent, operated by individual states with the financial participation of the federal government.
Private pay and other sources include commercial insurance, individual patients’ own funds, managed
care plans and the Veterans Administration. Although payment rates vary among these sources,
market forces and costs largely determine these rates.
Government reimbursement programs such as Medicare and Medicaid prescribe, by law, the billing
methods and amounts that health care providers may charge and be reimbursed to care for patients
covered by these programs. Congress passed a number of laws that have effected major changes in
the Medicare and Medicaid programs. See the “Results of Operations – Overview” section on pages
22-24 under Item 7, Management’s Discussion and Analysis, for additional discussion of Medicare and
Medicaid legislation.
Regulation and Licenses
Health care is an area of extensive regulatory oversight and frequent regulatory change. The
federal government and the states in which we operate regulate various aspects of our business.
These regulatory bodies, among other things, require us annually to license our skilled nursing
facilities, assisted living facilities in some states and other health care businesses, including
home health agencies and hospices. In particular, to operate nursing facilities and provide health
care services we must comply with federal, state and local laws relating to the delivery and
adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating
policies, fire prevention, rate-setting, building codes and environmental protection.
Governmental and other authorities periodically inspect our skilled nursing facilities, home health
agencies and hospices to assure that we continue to comply with their various standards. We must
pass these inspections to continue our licensing under state law, to obtain certification under the
Medicare and Medicaid programs, and to continue our participation in the Veterans Administration
program. We can only participate in other third-party programs if
our facilities
5
pass these inspections. In addition, these authorities inspect our record keeping
and inventory control.
From time to time, we, like others in the health care industry, may receive notices from federal
and state regulatory agencies alleging that we failed to comply with applicable standards. These
notices may require us to take corrective action, and may impose civil money penalties and/or other
operating restrictions on us. If our skilled nursing facilities, home health agencies and hospices
fail to comply with these directives or otherwise fail to comply substantially with licensure and
certification laws, rules and regulations, we could lose our certification as a Medicare and
Medicaid provider and/or lose our licenses.
Local and state health and social service agencies and other regulatory authorities specific to
their location regulate, to varying degrees, our assisted living facilities. Although regulations
and licensing requirements vary significantly from state to state, they typically address, among
other things, personnel education, training and records; facility services, including
administration of medication, assistance with supervision of medication management and limited
nursing services; physical plant specifications; furnishing of resident units; food and
housekeeping services; emergency evacuation plans; and resident rights and responsibilities. If
assisted living facilities fail to comply with licensing requirements, these facilities could lose
their licenses. Most states also subject assisted living facilities to state or local building
codes, fire codes and food service licensure or certification requirements. In addition, the
manner and extent to which the assisted living industry is regulated at federal and state levels
are evolving. Changes in the laws or new interpretations of existing laws as applied to the
skilled nursing facilities, the assisted living facilities or other components of our health care
businesses may have a significant impact on our methods and costs of doing business.
See Item 1A, Risk Factors, for additional discussion of laws and regulations applicable to our
business.
Employees
As of December 31, 2006, we had approximately 59,500 full- and part-time employees. Approximately
7,100 of our employees are salaried, and we pay the remainder on an hourly basis. Approximately
1,400 of our employees are members of labor unions.
Other Areas
See Item 1A, Risk Factors, for a discussion of our labor costs and competition.
6
Executive Officers of the Registrant
The names, ages, offices and positions held during the last five years of each of our executive
officers are as follows:
Executive Officers
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Office and Experience |
Paul A. Ormond
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President and Chief Executive Officer since August 1991; Chairman of the Board since
September 2001 and from August 1991 to September 1998; and a member of the Board of
Directors. |
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Stephen L. Guillard
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Executive Vice President and Chief Operating Officer since January 2007; a member of the
Board of Directors since December 2006; Executive Vice President of Manor Care from June
2005 to December 2006; and Chairman and Chief Executive Officer of Harborside Healthcare
Corporation from 1988 to May 2005. |
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Steven M. Cavanaugh
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Vice President and Chief Financial Officer since May 2006; and Vice President and
Director of Corporate Development from 1999 to April 2006. |
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Richard A. Parr II
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Vice President, General Counsel, and Secretary of Manor Care since May 2006; and
Executive Vice President, General Counsel, and Secretary of Concentra Inc., a national
provider of occupational healthcare and healthcare cost containment services, from August
1996 until joining Manor Care. |
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Nancy A. Edwards
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Vice President and General Manager of Central Division since December 1993. |
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John K. Graham
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Group Vice President, Hospice and Home Health Care since March 2005; Vice President and
General Manager of Eastern Division from July 2002 to February 2005; and Vice President
and Director of Rehabilitation Services from September 1998 to June 2002. |
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Jeffrey A. Grillo
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Vice President and General Manager of Mid-Atlantic Division since February 1999. |
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Office and Experience |
Lynn M. Hood
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Vice President and General Manager of Southeast Division since February 2006;
Assistant Vice President/General Manager of South-West Division(1) from
September 2004 to January 2006; and Regional Director of Operations(1) for
certain groups of facilities from 1995 to August 2004. |
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Larry C. Lester
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Vice President and General Manager of Midwest Division, and Director of Marketing since
July 2003; and Vice President and General Manager of Midwest Division from January 2000
to June 2003. |
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Spencer C. Moler
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Vice President and Controller since August 1991. |
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Susan E. Morey
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Vice President and General Manager of Eastern Division since May 2005; and Assistant Vice
President/General Manager of Eastern Division(1) from November 2001 to April
2005. |
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Michael J. Reed
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Vice President and General Manager of Assisted Living Division since December 2005; Vice
President and General Manager of Assisted Living Division(1) from October 2005
to November 2005; Senior Vice President of Marketing of Harborside Healthcare Corporation
from November 2003 to September 2005; and Vice President of Fountains Inc. from July 2001
to September 2003. |
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F. Joseph Schmitt
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Vice President and General Manager of West Division since February 2006; Vice President
and General Manager of South-West Division from September 2004 to January 2006; and Vice
President and General Manager of Southern Division from December 1993 to August 2004. |
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| (1) Position pertains to a subsidiary of Manor Care. |
8
Item 1A. Risk Factors
The following are certain risk factors that could affect our business, operations and
financial condition. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report on Form 10-K, because these factors
could cause the actual results and conditions to differ materially from those projected in
forward-looking statements. This section does not describe all risks applicable to us, our
industry or our business, and we intend it only as a summary of certain material factors. If any
of the following risks actually occur, our business, financial condition or results of operations
could be negatively affected. In that case, the trading price of our stock could decline.
We depend upon reimbursement by third-party payors.
Our revenues are derived from private and governmental third-party payors. In 2006, 39 percent of
our long-term care and rehabilitation revenues were derived from Medicare, 28 percent from Medicaid
and 33 percent from commercial insurers, managed care plans, workers’ compensation payors and other
private pay revenue sources. There are pressures from many payors to control health care costs and
to reduce or limit increases in reimbursement rates for health care services. Governmental payment
programs are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative or executive orders and government funding restrictions, all of which may materially
increase or decrease the rate of program payments to us for our services. In the past, we have
experienced a decrease in revenues primarily attributable to declines in government reimbursement
as a result of the Balanced Budget Act of 1997, or the Budget Act. Although certain rate
reductions resulting from the Budget Act were mitigated temporarily by federal legislation in 1999
and 2000, the Budget Act significantly changed the method of payment under the Medicare and
Medicaid programs for our services.
On August 4, 2005, the Centers for Medicare & Medicaid Services, or CMS, issued a final Medicare
skilled nursing facility payment rule for the 12 months ended September 30, 2006 that implemented
refinements to the patient classification system and triggered the expiration of the temporary
payment add-on for certain high-acuity patients. Skilled nursing facilities continued to be paid
under the prior classification system from October 1, 2005 through December 31, 2005, and the new
classification system became effective January 1, 2006. The
final rule also included a 3.1 percent inflation update (or market
basket increase) for the 12 months ended September 30, 2006. Therefore, although Medicare payments to
skilled nursing facilities were reduced by an estimated $1.02 billion because of the expiration of
the temporary payment add-on, this reduction was more than offset by a $510 million increase in
payments resulting from the refined classification system and a $530 million increase resulting
from the 3.1 percent market basket increase. We previously
expected our average Medicare rate to decrease $17 to $20 per day in the first quarter of 2006 as a
result of the expiration of payment add-ons and the new patient classification refinements.
However, we
offset the rate decrease in 2006 with our continuing shift to higher-acuity and higher
rate-category patients.
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Our
average Medicare rate in 2006 increased about $4 per day from the rate applicable in the fourth
quarter of 2005. This average 2006 rate does not include an
additional 3.1 percent market basket increase for fiscal year 2007,
which began October 1, 2006, announced in a July 31, 2006,
CMS notice updating Medicare skilled nursing facility prospective
payment system rates. The additional 3.1 percent market
basket increase is expected to increase Medicare payments to skilled nursing facilities by
approximately $560.0 million for fiscal year 2007.
In addition, in February 2006 Congress enacted the Deficit Reduction Act which will reduce net
Medicare and Medicaid spending by approximately $11 billion over five years, and in December 2006,
Congress passed the Tax Relief and Health Care Act of 2006, which also modifies a number of
Medicare and Medicaid policies. See the “Results of Operations
– Overview” section on pages 22-24
under Item 7, Management’s Discussion and Analysis, for additional discussion of Medicare and
Medicaid legislation and the effects on us. It is possible that future budget cuts in Medicare and
Medicaid may be enacted by Congress and implemented by CMS. Therefore, we cannot assure you that
payments from governmental or private payors will remain at levels comparable to present levels or
will, in the future, be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs.
States also have considerable discretion with respect to payments to providers under their Medicaid
programs, including funding for our services. In the future, changes to Medicaid may include rate
freezes, reducing eligibility, eliminating optional services and transitioning Medicaid patients to
less care-intensive settings. In addition, a number of states use various funding mechanisms to
increase federal Medicaid matching funds, including provider donation and tax programs and
intergovernmental transfers. Federal regulations currently permit states to use these funding
sources toward a state’s share of Medicaid expenditures if the state program meets federal
requirements, although CMS has proposed restrictions on the use of intergovernmental transfers to
fund Medicaid payments. Further, the Deficit Reduction Act and the Tax Relief and Health Care Act
of 2006 include several provisions designed to reduce Medicaid program spending.
The health care industry reimbursement process is complex and can involve lengthy delays between
the time that revenue is recognized and the time that reimbursement amounts are settled. As a
result, the reimbursement process may affect our financial condition and results of operations. In
fact, we are subject to periodic audits by the Medicare and Medicaid programs, and the paying
agencies for these programs have various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements. These payment and
government agencies can reopen previously filed and reviewed cost reports and require us to repay
any overcharges, as well as make deductions from future amounts due to us. In the ordinary course
of business, we appeal the Medicare
and Medicaid program’s denial of costs claimed to seek recovery of those denied costs. For
example, we are currently appealing the Medicare fiscal intermediary’s incorrect adjustment of
certain expenses on the 1997 through 1999 home office cost reports of a predecessor entity, which
required us to make a repayment of
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$34.1 million in 2005, an amount that is recorded as a
receivable on our balance sheet. Although we believe that we have strong arguments to support why
these amounts should be returned to us, there is no guarantee that we will be successful in our
appeal or that this process will be completed in an expeditious manner. A failure of our appeal
could lead to the establishment of reserves and the eventual write-off of the receivables we have
established. More generally, due to the complexity of the reimbursement process, we could be
subject to civil false claims assessments, fines, criminal penalties or program exclusions as a
result of a determination of program violations by the Department of Justice and the Office of
Inspector General, Department of Health and Human Services. Private pay sources also reserve
rights to conduct audits and make monetary adjustments.
See the
“Results of Operations – Overview” section on pages
22-24 under Item 7, Management’s
Discussion and Analysis, for additional discussion of Medicare and Medicaid legislation.
If we fail to comply with extensive laws and government regulations, we could suffer penalties or
be required to make significant changes to our operations.
The health care industry, including our company, is required to comply with extensive and complex
laws and regulations at the federal, state and local government levels relating to, among other
things:
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¨ Licensure and certification; |
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¨ Adequacy and quality of health care services; |
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¨ Qualifications of health care and support personnel; |
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¨ Quality of medical equipment; |
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¨ Confidentiality, maintenance and security issues associated with medical records and
claims processing; |
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¨ Relationships with physicians and other referral sources; |
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¨ Operating policies and procedures; |
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¨ Addition of facilities and services; and |
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¨ Billing for services. |
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Many of these laws and regulations are broad and general, and guidance in the form of significant
regulatory or judicial interpretation is not always available. In addition, certain regulatory
developments, such as revisions in the building code requirements for assisted living and skilled
nursing facilities, mandatory increases in scope and quality of care to be offered to patients, and
revisions in licensing and certification standards, could have a material adverse effect on us. In
the future, new, changed or inconsistent interpretations or enforcement of these laws and
regulations could subject our current or past practices to allegations of impropriety or illegality
or could require us to make changes in our facilities, equipment, personnel, services, capital
expenditure programs and operating expenses.
If we fail to comply with applicable laws and regulations, we could be subjected to liabilities,
including criminal penalties, civil penalties (including the loss of our licenses to operate one or
more of our facilities) and exclusion of one or more of our facilities from participation in the
Medicare, Medicaid, and other federal and state health care programs.
Both federal and state government agencies have heightened and coordinated civil and criminal
enforcement efforts as part of numerous ongoing investigations of health care companies and, in
particular, skilled nursing facilities and hospice and home health care agencies. These
investigations relate to a wide variety of topics, including:
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¨ Cost reporting and billing practices; |
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¨ Quality of care; |
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¨ Financial relationships with referral sources; and |
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¨ Medical necessity of services provided. |
In addition, the Office of the Inspector General of the Department of Health and Human Services and
the Department of Justice have, from time to time, established national enforcement initiatives
that focus on specific billing practices or other suspected areas of abuse. As do other
participants in the health care industry, we receive requests from time to time for information
from governmental agencies in connection with their regulatory or investigational authority.
Moreover, health care providers are also subject to ‘‘qui tam’’ whistleblower lawsuits and false
claims provisions at both the state and federal level.
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We are required to comply with laws governing the transmission and privacy of health information.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply
with standards for the exchange of health information within our company and with third parties,
such as payors, business associates and patients. These include standards for common health care
transactions, such as:
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¨ Claims information, plan eligibility, payment information and the use of electronic
signatures; |
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¨ Unique identifiers for providers, employers, health plans and individuals; and |
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¨ Security, privacy and enforcement. |
The Department of Health and Human Services has released final rules to implement a number of these
requirements, and several HIPAA initiatives have become effective, including privacy protections,
transaction standards, and security standards. If we fail to comply with these standards, we could
be subject to criminal penalties and civil sanctions.
State efforts to regulate the construction or expansion activities of health care providers could
impair our ability to expand our operations.
Some states require health care providers (including skilled nursing facilities, hospices, home
health agencies and assisted living facilities) to obtain prior approval, known as a certificate of
need, or CON, for:
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¨ The purchase, construction or expansion of health care facilities; |
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¨ Capital expenditures exceeding a prescribed amount; or |
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¨ Changes in services or bed capacity. |
To the extent that we require a CON or other similar approvals to expand our operations, either by
acquiring facilities or expanding or providing new services or other changes, our expansion could
be adversely affected by the failure or inability to obtain the necessary approvals, changes in the
standards applicable to those approvals, and possible delays and expenses associated with obtaining
those approvals. We cannot assure you that we will be able to obtain CON approval for all future
projects requiring that approval.
13
Health care reform legislation may affect our business.
In recent years, there have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care services. Aspects
of certain of these initiatives could adversely affect us, such as:
| |
|
|
¨ Reductions in funding of the Medicare and Medicaid programs; |
| |
| |
|
|
¨ Potential changes in reimbursement regulations by CMS; |
| |
| |
|
|
¨ Enhanced pressure to contain health care costs by Medicare, Medicaid and other
payors; and |
| |
| |
|
|
¨ Greater state flexibility and additional operational requirements in the
administration of Medicaid. |
There can be no assurance as to the ultimate content, timing or effect of any such initiatives, nor
is it possible at this time to estimate their impact on us. That impact may be material to our
financial condition or our results of operations.
We face national, regional and local competition.
Our nursing facilities compete primarily on a local and regional basis with many long-term care
providers, some of whom may own as few as a single nursing center. Our ability to compete
successfully varies from location to location depending on a number of factors, including the
number of competing centers in the local market; the types of services available; quality of care;
reputation, age and appearance of each center; and the cost of care in each locality.
We also compete with a variety of other companies in providing assisted living services, hospice
and home health care services, and rehabilitation therapy services. Given the relatively low
barriers to entry and continuing health care cost-containment pressures in these areas, we expect
that they will become increasingly competitive in the future. Increased competition in the future
could limit our ability to attract and retain patients, to maintain or increase fees, or to expand
our business.
Labor costs may increase with a potential shortage of qualified personnel.
A shortage of nurses or other trained personnel and general inflationary pressures have required us
to enhance our wage and benefits packages in order to compete for qualified personnel. We compete
with other health care providers to attract and retain qualified or skilled personnel. Because the
skill levels required of and wages demanded by our caregivers, particularly registered nurses and
therapists, increases as we shift our patient base to higher-
acuity patients, we may face difficulty retaining those individuals. We also compete with various
industries for
14
lower-wage employees. We have used and will continue to use, when needed,
high-priced temporary help to supplement staffing levels in certain markets with shortages of
health care workers. If the shortage of nurses or other health care
workers worsens in the
geographic areas in which we operate, it could adversely affect our ability to attract and retain
qualified personnel and could further increase our operating costs.
See the
“Results of Operations – Overview” section on page 24 under Item 7, Management’s Discussion
and Analysis, for additional discussion of labor.
Our operations are subject to occupational health and safety regulations.
We are subject to a wide variety of federal, state and local occupational health and safety laws
and regulations. The types of regulatory requirements faced by health care providers such as us
include:
| |
|
|
¨ Air and water quality control requirements; |
| |
| |
|
|
¨ Occupational health and safety requirements (such as standards regarding blood-borne
pathogens and ergonomics) and waste management requirements; |
| |
| |
|
|
¨ Specific regulatory requirements applicable to asbestos, polychlorinated biphenyls
and radioactive substances; |
| |
| |
|
|
¨ Requirements for providing notice to employees and members of the public about
hazardous materials and wastes; and |
| |
| |
|
|
¨ Certain other requirements. |
If we fail to comply with these standards, we may be subject to sanctions and penalties.
We may be unable to reduce costs to offset completely decreases in our occupancy rates.
We depend on implementing adequate cost management initiatives in response to fluctuations in
levels of occupancy in our skilled nursing and assisted living facilities and in other sources of
income in order to maintain our current cash flow and earnings levels. Fluctuation in our
occupancy levels may become more common as we increase our emphasis on patients with shorter stays
but higher acuities. A decline in our occupancy rates could result in decreased revenues. If we
are unable to put in place corresponding adjustments in costs in response to declines in census or
other revenue shortfalls, we may be unable to prevent future decreases in earnings. As a result,
our financial condition and operating results may be adversely affected.
15
The cost of general and professional liability claims may increase.
Patient care liability remains a serious industry-wide cost issue. The health care industry has
continued to benefit from the positive effect of the passage of tort reform measures in certain key
states. Despite those reforms, if patient care claims significantly increase in number and size,
our future financial condition and operating results may be adversely affected.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Our principal properties and those of our subsidiaries, which are of material importance to
the conduct of our and their business, consist of 343 long-term care centers located in 30 states.
The centers are predominately single-story structures with brick or stucco facades, dry wall
partitions and attractive interior finishes. Common areas of the skilled nursing facilities
include dining, therapy, personal care and activity rooms, and patient and visitor lounges, as well
as administrative offices and employee lounges. We believe that all of our centers have been well
maintained and are suitable for the conduct of our business.
16
The following table shows the number and location of centers and beds we operated as of December
31, 2006 for our long-term care segment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Centers |
|
|
| |
|
|
|
|
|
Assisted |
|
|
| |
|
Skilled |
|
Living |
|
Number of Beds |
Pennsylvania |
|
|
46 |
|
|
|
9 |
|
|
|
8,031 |
|
Ohio |
|
|
43 |
|
|
|
9 |
|
|
|
6,251 |
|
Florida |
|
|
28 |
|
|
|
11 |
|
|
|
4,610 |
|
Illinois |
|
|
29 |
|
|
|
8 |
|
|
|
4,577 |
|
Michigan |
|
|
28 |
|
|
|
3 |
|
|
|
3,787 |
|
Maryland |
|
|
14 |
|
|
|
9 |
|
|
|
2,742 |
|
Texas |
|
|
12 |
|
|
|
4 |
|
|
|
2,100 |
|
California |
|
|
9 |
|
|
|
|
|
|
|
1,289 |
|
Virginia |
|
|
6 |
|
|
|
2 |
|
|
|
1,038 |
|
West Virginia |
|
|
7 |
|
|
|
|
|
|
|
927 |
|
Wisconsin |
|
|
8 |
|
|
|
|
|
|
|
868 |
|
Indiana |
|
|
4 |
|
|
|
1 |
|
|
|
859 |
|
South Carolina |
|
|
7 |
|
|
|
|
|
|
|
853 |
|
New Jersey |
|
|
4 |
|
|
|
4 |
|
|
|
747 |
|
Iowa |
|
|
5 |
|
|
|
|
|
|
|
526 |
|
Kansas |
|
|
3 |
|
|
|
|
|
|
|
487 |
|
Washington |
|
|
4 |
|
|
|
|
|
|
|
482 |
|
Oklahoma |
|
|
4 |
|
|
|
|
|
|
|
478 |
|
Missouri |
|
|
3 |
|
|
|
|
|
|
|
430 |
|
Delaware |
|
|
2 |
|
|
|
1 |
|
|
|
361 |
|
Colorado |
|
|
2 |
|
|
|
|
|
|
|
310 |
|
Georgia |
|
|
2 |
|
|
|
|
|
|
|
257 |
|
Kentucky |
|
|
1 |
|
|
|
1 |
|
|
|
242 |
|
North Dakota |
|
|
2 |
|
|
|
|
|
|
|
215 |
|
Nevada |
|
|
1 |
|
|
|
|
|
|
|
189 |
|
Connecticut |
|
|
|
|
|
|
3 |
|
|
|
180 |
|
Utah |
|
|
1 |
|
|
|
|
|
|
|
140 |
|
North Carolina |
|
|
1 |
|
|
|
|
|
|
|
120 |
|
Arizona |
|
|
1 |
|
|
|
|
|
|
|
118 |
|
South Dakota |
|
|
1 |
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
278 |
|
|
|
65 |
|
|
|
43,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We own 335 of these centers, lease seven, and have a partnership in one center. These
include 65 assisted living facilities that we operate with a total of 5,080 beds. Four of our
properties are subject to liens that encumber the properties in an aggregate amount of $2.6
million.
We lease space for our corporate headquarters in Toledo, Ohio under a synthetic lease. We discuss
our obligation for this lease in the “Off-Balance Sheet
Arrangement” section on pages 37-38 under
Item 7, Management’s Discussion and Analysis. We also lease space for our
hospice and home health offices; hospice inpatient units, except for one that we own; and
outpatient therapy clinics.
17
Item 3. Legal Proceedings
See the
“Commitments and Contingencies” section on page 38 under Item 7, Management’s
Discussion and Analysis, for a discussion of litigation related to environmental matters and
patient care-related claims.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common
Stock and Dividends
Our common stock is listed under the symbol “HCR” on the New York Stock Exchange, which is the
principal market on which the stock is traded. On January 31, 2007, we had approximately 2,150
stockholders of record. The high, low and closing prices of our stock on the New York Stock
Exchange and dividends declared and paid during 2006 and 2005 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
High |
|
Low |
|
Close |
|
Cash
Dividends |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
44.89 |
|
|
$ |
38.50 |
|
|
$ |
44.35 |
|
|
$ |
.16 |
|
Second Quarter |
|
$ |
47.52 |
|
|
$ |
41.96 |
|
|
$ |
46.92 |
|
|
$ |
.16 |
|
Third Quarter |
|
$ |
53.68 |
|
|
$ |
46.37 |
|
|
$ |
52.28 |
|
|
$ |
.16 |
|
Fourth Quarter |
|
$ |
52.28 |
|
|
$ |
46.43 |
|
|
$ |
46.92 |
|
|
$ |
.16 |
|
| |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
36.59 |
|
|
$ |
32.26 |
|
|
$ |
36.36 |
|
|
$ |
.15 |
|
Second Quarter |
|
$ |
41.16 |
|
|
$ |
30.87 |
|
|
$ |
39.73 |
|
|
$ |
.15 |
|
Third Quarter |
|
$ |
40.46 |
|
|
$ |
34.70 |
|
|
$ |
38.41 |
|
|
$ |
.15 |
|
Fourth Quarter |
|
$ |
41.10 |
|
|
$ |
36.46 |
|
|
$ |
39.77 |
|
|
$ |
.15 |
|
In January 2007, our Board of Directors increased our quarterly dividend to 17 cents per share of
common stock. Although we currently intend to declare and pay regular quarterly cash dividends,
there can be no assurance that any dividends will be declared, paid or increased in the future.
18
Shareholder Assistance
If you have questions about your account or your shares of Manor Care stock, please contact our
stock transfer agent, National City Bank.
National City Bank
Corporate Trust Operations
3rd Floor – North Annex
4100 W. 150th Street
Cleveland, Ohio 44135
Phone: (800) 622-6757
Fax: (216) 257-8508
Mailing address:
P.O. Box 92301
Cleveland, Ohio 44193-0900
Issuer Purchases of Equity Securities
The following table provides information with respect to stock we repurchased during the fourth
quarter of 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
| |
|
|
|
|
|
Average |
|
|
Shares Purchased as |
|
|
Value of Shares that |
|
| |
|
Total Number |
|
|
Price |
|
|
Part of Publicly |
|
|
May Yet Be Purchased |
|
| |
|
of Shares |
|
|
Paid per |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
| Period |
|
Purchased |
|
|
Share |
|
|
Programs (1) |
|
|
Programs (1) |
|
10/1/06-10/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
170,275,747 |
|
11/1/06-11/30/06 |
|
|
725,000 |
|
|
$ |
47.32 |
|
|
|
725,000 |
|
|
$ |
135,968,820 |
|
12/1/06-12/31/06 |
|
|
502,300 |
|
|
$ |
47.48 |
|
|
|
502,300 |
|
|
$ |
112,119,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,227,300 |
|
|
$ |
47.39 |
|
|
|
1,227,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The Company’s Board of Directors authorized the following share repurchase
programs, and two of the programs expired on December 31, 2006 but were fully utilized: |
| |
|
|
|
|
|
|
| |
|
Amount |
|
|
| Date |
|
Approved |
|
Expiration |
| Announced |
|
(in millions) |
|
Date |
July 22, 2005
|
|
$ |
300 |
|
|
December 31, 2006 |
January 27, 2006
|
|
$ |
100 |
|
|
December 31, 2006 |
May 10, 2006
|
|
$ |
300 |
|
|
December 31, 2007 |
19
Item 6. Selected Financial Data
Five-Year Financial History
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(In thousands, except per share amounts and Other Data) |
|
Results of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,613,185 |
|
|
$ |
3,417,290 |
|
|
$ |
3,208,867 |
|
|
$ |
3,029,441 |
|
|
$ |
2,905,448 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
2,969,887 |
|
|
|
2,820,431 |
|
|
|
2,647,849 |
|
|
|
2,523,534 |
|
|
|
2,401,636 |
|
General and administrative |
|
|
195,906 |
|
|
|
164,189 |
|
|
|
140,587 |
|
|
|
157,566 |
|
|
|
131,628 |
|
Depreciation and amortization |
|
|
145,379 |
|
|
|
139,203 |
|
|
|
127,821 |
|
|
|
128,810 |
|
|
|
124,895 |
|
Asset impairment |
|
|
10,792 |
|
|
|
2,451 |
|
|
|
|
|
|
|
|
|
|
|
33,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,321,964 |
|
|
|
3,126,274 |
|
|
|
2,916,257 |
|
|
|
2,809,910 |
|
|
|
2,691,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income (expenses)
and income taxes |
|
|
291,221 |
|
|
|
291,016 |
|
|
|
292,610 |
|
|
|
219,531 |
|
|
|
213,715 |
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(31,513 |
) |
|
|
(41,240 |
) |
|
|
(42,420 |
) |
|
|
(41,927 |
) |
|
|
(37,651 |
) |
Early extinguishment of debt |
|
|
|
|
|
|
(18,634 |
) |
|
|
(11,160 |
) |
|
|
|
|
|
|
|
|
Gain (loss) on sale of assets |
|
|
(210 |
) |
|
|
16,431 |
|
|
|
6,400 |
|
|
|
3,947 |
|
|
|
30,651 |
|
Equity in earnings of affiliated companies |
|
|
5,776 |
|
|
|
5,492 |
|
|
|
6,975 |
|
|
|
7,236 |
|
|
|
4,761 |
|
Interest income and other |
|
|
1,284 |
|
|
|
4,607 |
|
|
|
2,474 |
|
|
|
1,625 |
|
|
|
1,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
|
(24,663 |
) |
|
|
(33,344 |
) |
|
|
(37,731 |
) |
|
|
(29,119 |
) |
|
|
(1,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
266,558 |
|
|
|
257,672 |
|
|
|
254,879 |
|
|
|
190,412 |
|
|
|
212,684 |
|
Income taxes |
|
|
96,998 |
|
|
|
96,717 |
|
|
|
86,657 |
|
|
|
71,405 |
|
|
|
80,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect |
|
$ |
169,560 |
|
|
$ |
160,955 |
|
|
$ |
168,222 |
|
|
$ |
119,007 |
|
|
$ |
131,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.24 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
|
$ |
1.33 |
|
|
$ |
1.34 |
|
Diluted |
|
$ |
2.17 |
|
|
$ |
1.89 |
|
|
$ |
1.90 |
|
|
$ |
1.30 |
|
|
$ |
1.33 |
|
Cash dividends declared per common share |
|
$ |
.64 |
|
|
$ |
.60 |
|
|
$ |
.56 |
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operations |
|
$ |
275,184 |
|
|
$ |
353,948 |
|
|
$ |
329,766 |
|
|
$ |
300,464 |
|
|
$ |
283,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,398,477 |
|
|
$ |
2,339,234 |
|
|
$ |
2,350,464 |
|
|
$ |
2,396,711 |
|
|
$ |
2,329,072 |
|
Long-term debt |
|
|
955,211 |
|
|
|
707,666 |
|
|
|
555,275 |
|
|
|
659,181 |
|
|
|
373,112 |
|
Shareholders’ equity |
|
|
573,193 |
|
|
|
773,723 |
|
|
|
984,159 |
|
|
|
975,105 |
|
|
|
1,016,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of skilled nursing and
assisted living facilities |
|
|
343 |
|
|
|
341 |
|
|
|
344 |
|
|
|
363 |
|
|
|
366 |
|
See Management’s Discussion and Analysis comparing the results of operations for the years
2004 through 2006 on pages 27-33. In 2002, the Company recorded $33.6 million in asset impairment,
which was included on a separate line item, and $30.7 million on the net gain on sale of assets,
which included $31.1 million related to the sale of the Company’s only hospital that was located in
Mesquite, Texas.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations — Overview
Manor Care, Inc., which we also refer to as Manor Care or HCR Manor Care, provides a range of
health care services, including skilled nursing care, assisted living, post-acute medical and
rehabilitation care, hospice care, home health care and rehabilitation therapy.
Long-Term Care. The most significant portion of our business relates to long-term care,
including skilled nursing care and assisted living. On December 31, 2006, we operated 278 skilled
nursing facilities and 65 assisted living facilities in 30 states, with 62 percent of our
facilities located in Florida, Illinois, Michigan, Ohio and Pennsylvania. Within some of our
centers, we have medical specialty units which provide post-acute medical and rehabilitation care
and/or Alzheimer’s care programs.
The table below details the activity in the number of skilled nursing and assisted living
facilities and beds during the past three years. The additions represent facilities that we built.
The divestitures include facilities that were sold or converted into a long-term acute care
hospital, as well as facilities with a lease that expired or was terminated. We sold certain
facilities that no longer fit our strategic growth plan. Their results of operations are
insignificant to us. In 2006, we completed construction on three skilled nursing centers, two of
which opened in 2006 and one which opened in January 2007. We currently have one skilled nursing
facility under construction, which we expect to open in the spring of 2007. We have not included
in the table any activity related to expansion of beds in existing facilities.
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| |
|
2006 |
|
2005 |
|
2004 |
| |
|
Facilities |
|
Beds |
|
Facilities |
|
Beds |
|
Facilities |
|
Beds |
Skilled nursing facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
2 |
|
|
|
240 |
|
|
|
1 |
|
|
|
100 |
|
|
|
2 |
|
|
|
173 |
|
Divestitures |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
565 |
|
|
|
16 |
|
|
|
2,613 |
|
Assisted living facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divestitures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
532 |
|
Hospice and Home Health. Our hospice and home health business includes all levels of hospice
care, home care and rehabilitation therapy, with 116 offices in 25 states. In addition, we
operated nine inpatient hospice facilities at December 31, 2006. The growth in our hospice and
home health business is primarily a result of opening additional offices and expanding our hospice
patient base in existing markets where we also operate long-term care facilities. We also had
growth from small acquisitions.
21
Other Health Care Services. In addition to the rehabilitation provided in each of our skilled
nursing centers, we provide rehabilitation therapy in our 92 outpatient therapy clinics and at work
sites, schools, hospitals and other health care settings. Our outpatient therapy business
primarily performs services in Midwestern and Mid-Atlantic states, Texas and Florida.
Other Services. In the fourth quarter of 2006, we sold our medical transcription company,
whose business was converting medical dictation into electronically formatted patient records.
Health care providers use the records in connection with patient care and other administrative
purposes.
Medicare and Medicaid Payments. Government reimbursement programs such as Medicare and
Medicaid prescribe, by law, the billing methods and amounts that health care providers may charge
and be reimbursed to care for patients covered by these programs. Congress has passed a number of
laws that have effected major changes in the Medicare and Medicaid programs. The Balanced Budget
Act of 1997, or the Budget Act, sought to achieve a balanced federal budget by, among other things,
reducing federal spending on Medicare and Medicaid to various providers.
In 1999 and 2000, Congress passed legislation to redress certain reductions in Medicare
reimbursement resulting from the Budget Act. Further refinements also were made by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003. In addition, in February 2006,
Congress enacted the Deficit Reduction Act, or DRA, which will reduce net Medicare and Medicaid
spending, and in December 2006, Congress passed the Tax Relief and Health Care Act of 2006, which
also affects payments under the Medicare and Medicaid programs. Several key provisions of this
legislation and implementing regulations include:
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¨ |
|
A temporary payment increase for certain high-cost nursing home
patients, for services provided from April 1, 2000 and continuing
until the Centers for Medicare & Medicaid Services, or CMS,
implements a refined patient classification to better account for
medically complex patients. Although CMS did not implement such
refinements for several years, CMS’ final payment rule for fiscal
year 2006 adopted the new patient classification refinements
effective January 1, 2006, thus triggering the expiration of the
high-acuity payment add-ons. We previously expected our average
Medicare rate to decrease $17 to $20 per day in the first quarter
of 2006 as a result of the expiration of payment add-ons and new
patient classification refinements. However, we offset the rate
decrease in 2006 with our continuing shift to higher-acuity and
higher rate-category patients. Excluding the 3.1 percent rate
increase effective October 1, 2006, our average Medicare rate in
2006 increased about $4 per day from the rate applicable in the
fourth quarter of 2005. |
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¨ |
|
A moratorium on the Budget Act’s annual $1,500 therapy cap
(indexed for inflation) on each of physical/speech therapy and
occupational therapy beginning |
22
| |
|
|
with services provided on or after
January 1, 2000 through December 31, 2002. The per-beneficiary
limits were imposed from September 1, 2003 to December 8, 2003,
but were suspended again through calendar year 2005. With the
expiration of the moratorium, they became effective January 1,
2006, subject to an exception process that allows additional
therapy to beneficiaries over the cap levels. The
inflation-adjusted caps were $1,740 in 2006. As of January 1,
2007, the inflation-adjusted caps are $1,780. The exception
process continues, and is automatic for beneficiaries with
qualifying conditions. |
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| |
¨ |
|
In the Tax Relief and Health Care Act of 2006, Congress reduced the limit on
Medicaid provider taxes for the period January 1, 2008 through September 30, 2011
from the 6 percent set by CMS regulations to a 5.5 percent limit set by statute.
The Bush Administration had been expected to issue regulations calling for deeper
cuts in this funding. |
Our Medicare rates for 2004 through 2006 were affected by the following annual increases.
CMS increased skilled nursing facility payment rates by providing an inflation update (or market
basket increase) of 2.8 percent, 3.1 percent and 3.1 percent effective October 1, 2004, 2005 and
2006, respectively. No assurances can be given as to whether Congress will increase or decrease
reimbursement in the future, the timing of any action or the form of relief, if any, that may be
enacted.
We face challenges with respect to states’ Medicaid payments, because many currently do not cover
the total costs incurred in providing care to those patients. States will continue to control
Medicaid expenditures but also look for adequate funding sources, including provider assessments.
Our average Medicaid rate increased 4 percent between 2005 and 2006. However, when taking into
account the increase in accompanying state provider assessments, the net Medicaid rate increased
approximately 3 percent between 2005 and 2006. We expect our Medicaid rate net of provider
assessments to increase about 3 percent in 2007. Further, DRA includes several provisions designed
to reduce Medicaid spending. These provisions include, among others, provisions strengthening the
Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care
coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to
uncompensated care. Other provisions could increase state funding for home and community-based
services, potentially having an impact on funding for nursing facilities. There is no assurance
that the funding for our services will increase or decrease in the future.
On February 5, 2007, the Bush Administration released its fiscal year 2008 budget proposal, which,
if enacted, would reduce Medicare spending by approximately $5.3 billion in fiscal year 2008 and
$75.8 billion over five years. In particular, the budget proposal would freeze payments in fiscal
year 2008 for skilled nursing facilities, and the payment update would be 0.65 percent less than
the routine inflation update (or market basket increase) annually thereafter. Home
23
health agency
payment rates would be frozen in 2008 through 2012, and the update would be reduced by 0.65
annually thereafter. Payment updates for hospice services would be reduced by 0.65 percent below
the full market basket level beginning in fiscal year 2008 and thereafter. The budget also would
move toward site-neutral post-hospital payments to limit what the Administration characterizes as
inappropriate incentives for five conditions commonly treated in both skilled nursing facilities
and inpatient rehabilitation facilities. All bad debt reimbursement for unpaid beneficiary
cost-sharing would be eliminated over four years. In addition, a budget mechanism would be
established to automatically reduce Medicare spending if the portion of Medicare expenditures
funded through general revenue is projected to exceed 45 percent within the next seven years. The
budget also includes a series of proposals having an impact on Medicaid, including legislative and
administrative changes that would reduce Medicaid payments by almost $26 billion over five years.
Many of the proposed policy changes would require congressional approval to implement.
Labor. Labor costs consist of wages, temporary nursing staffing and payroll overhead,
including workers’ compensation. Labor costs accounted for approximately 59 percent of the
operating expenses of our long-term care segment in 2006. Our long-term care wage rate increases
in
2006 were approximately 4 percent. We continued to decrease our workers’ compensation expense in
2006. See additional discussion of workers’ compensation under Critical Accounting Policies.
We compete with other health care providers to attract and retain qualified or skilled personnel.
We also compete with various industries for lower-wage employees. Although we currently do not
face a staffing shortage in all markets where we operate, we have used high-priced temporary help
to supplement staffing levels in markets with shortages of health care workers. Since 2001, we
have implemented additional training and education programs which have helped with retention of
employees. Our temporary staffing costs remained stable between 2004 and 2006 and represented less
than 1 percent of our labor costs for each of those years. Approximately 80 percent of our
facilities did not use temporary staffing in the fourth quarter of 2006. If the shortage of nurses
or other health care workers worsens in the geographic areas in which we operate, it could adversely
affect our ability to attract and retain qualified personnel and could further increase our
operating costs.
General and Professional Liability Costs. Patient care liability remains a serious
industry-wide cost issue. The health care industry is making progress in state legislatures and at
the national level to enact tort reform. Certain key states have made a start at meaningful tort
reform. With tort reform and our proactive management initiatives, our number of new claims has
stabilized, and our average settlement cost per claim has decreased.
24
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles. When more than one accounting principle, or the method
of its application, is generally accepted, we select the principle or method that is appropriate in
our specific circumstances. Application of these accounting principles requires us to make
estimates about the future resolution of existing uncertainties; as a result, actual results could
differ from these estimates. In preparing these financial statements, we have made our best
estimates and judgments of the amounts and disclosures included in the financial statements, giving
due regard to materiality.
Receivables and Revenue Recognition. Revenues are recognized when the related patient
services are provided. The revenues are based on established rates adjusted to amounts expected to
be received under governmental programs and other third-party contractual arrangements.
Receivables and revenues are stated at amounts estimated by us to be the net realizable value. No
individual customer or group of customers accounts for a significant portion of our revenues or
receivables. Certain classes of patients rely on a common source of funds to pay the cost of their
care, such as the federal Medicare program and various state Medicaid programs. Medicare program
revenues for the years prior to the implementation of the prospective payment system and certain
Medicaid program revenues are subject to audit and retroactive adjustment by government
representatives. We are currently appealing the Medicare fiscal intermediary’s incorrect
adjustment of certain expenses on the 1997 through 1999 home office cost reports of a predecessor
entity, which required us to make a repayment of $34.1 million in 2005, an amount that is recorded
as a receivable on our balance sheet. Although we believe that we have strong arguments to support
why these amounts should be returned to us, there is no guarantee that we will be successful in our
appeal or that this process will be completed in an expeditious manner. A failure of our appeal
could lead to the establishment of reserves and the eventual write-off of the receivables we have
established.
Allowance for Doubtful Accounts. We evaluate the collectibility of our accounts receivable
based on certain factors, such as payor type, historical collection trends and aging categories.
The percentage that we apply to the receivable balances is based on our historical experience and
time limits, if any, for each particular pay source, such as private, other/insurance, Medicare and
Medicaid.
Impairment of Property and Equipment, Intangible Assets and Goodwill. We evaluate our
property and equipment and intangible assets on a quarterly basis to determine if facts and
circumstances suggest that the assets may be impaired or that the life of the asset may need to be
changed. We consider internal and external factors of the individual facility or asset, including
changes in the regulatory environment, changes in national health care trends, current period cash
flow loss combined with a history of cash flow losses, and local market developments. If these
factors and the projected undiscounted cash flow of the entity over its remaining life indicate
that
25
the asset will not be recoverable, the carrying value will be adjusted to its fair value if it
is lower. If our projections or assumptions change in the future, we may be required to record
additional impairment charges for our assets.
We test for the recoverability of goodwill annually on October 1, or sooner if events or changes in
circumstances indicate that the carrying amounts of our reporting units, including goodwill, may
exceed their fair values. The fair value of the reporting units is determined by using cash flow
analysis
which projects the future cash flows and discounts those cash flows to the present value. The
projection of future cash flows is dependent upon assumptions regarding future levels of income,
including changes in Medicare and Medicaid reimbursement regulations. If the carrying value of a
reporting unit exceeds the fair value, the goodwill of the reporting unit is potentially impaired,
subject to additional analysis. In such a case, we may have to record a charge to our results of
operations based on the results of the additional analysis.
General and Professional Liability. We purchase general and professional liability insurance
and have maintained an unaggregated self-insured retention per occurrence ranging from $0.5 million
to $12.5 million, depending on the policy year and state. In addition, for the policy period
beginning June 1, 2004, we formed a captive insurance entity to provide a coverage layer of $12.5
million in excess of $12.5 million per claim.
Our general and professional reserves include amounts for patient care-related claims and incurred
but not reported claims. The amount of our reserves is determined based on an estimation process
that uses information obtained from both Company-specific and industry data. The estimation
process requires us to continuously monitor and evaluate the life cycle of the claims. Using data
obtained from this monitoring and our assumptions about emerging trends, we estimate the ultimate
size of claims based on our historical experience and other available industry information. The
most significant assumptions used in the estimation process include determining the trend in costs,
the expected cost of claims incurred but not reported and the expected costs to settle unpaid
claims. Our assumptions take into consideration our internal efforts to contain our costs by
reviewing our risk management programs, our operational and clinical initiatives, and other
industry changes affecting the long-term care market. We also monitor the reasonableness of the
judgments made in the prior-year estimation process and adjust our current-year assumptions
accordingly.
We do see an improving trend in terms of patient liability costs. Over the past three years, our
number of new claims has been stable, and our average settlement cost per claim has decreased.
Based on our review of trends, we determined that we would lower our accrual rate in the fourth
quarter of 2006 by $2.4 million related to this quarter and on a prospective quarterly basis, and
$4.4 million related to prior quarters in 2006. We expect our accrual for current claims to be
$4.3 million per month through our policy period ending May 31, 2007. We did not make any change
to our accrual rate in 2005, but we lowered our accrual rate by approximately $1.2 million on a
quarterly basis in the fourth quarter of 2004. At December 31, 2006 and 2005, our
26
general and
professional liability consisted of short-term reserves of $61.7 million and $61.8 million,
respectively, and long-term reserves of $109.0 million and $118.5 million, respectively. The
expense for general and professional liability claims, premiums and administrative fees was $64.5
million, $72.5 million and $78.7 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Although we believe our liability reserves are adequate and appropriate, we can give
no assurance that these reserves will not require material adjustment in future periods.
Workers’ Compensation Liability. Our workers’ compensation reserves are determined based on
an estimation process that uses Company-specific data. We continuously monitor the claims and
develop information about the ultimate cost of the claims based on our historical experience. The
most significant assumptions used in the estimation process include determining the trend in costs,
the expected costs of claims incurred but not reported and the expected future costs related to
existing
claims. In addition, we review industry trends, changes in the regulatory environment and our
internal efforts to contain our costs with safety and training programs. During 2003 and
continuing into 2004, we expanded and increased attention to our safety, training and claims
management programs. The number of new claims in 2006 decreased in comparison to the past two
years. As a result of these factors, our workers’ compensation expense decreased over the last
three years. Our expense was $22.4 million, $24.5 million and $26.6 million for the years ended
December 31, 2006, 2005 and 2004, respectively. At December 31, 2006 and 2005, the workers’
compensation liability consisted of short-term reserves of $21.0 million and $20.8 million,
respectively, and long-term reserves of $37.0 million and $40.5 million, respectively. Although we
believe our liability reserves are adequate and appropriate, we can give no assurance that these
reserves will not require material adjustment in future periods.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Revenues. Our revenues in 2006 increased $195.9 million, or 6 percent, compared with 2005.
Our revenues increased $248.6 million, or 7 percent, when excluding $52.7 million of prior-year
revenues associated with provider assessments for several states, including Pennsylvania, in the
first quarter of 2005. See the explanation below on how revenues and expenses are affected by
provider assessments.
The Medicaid program is financed jointly by the federal government and the states. Under federal
law, the states’ share of Medicaid costs generally must be financed from state or local public
funds. However, the federal government provides additional federal matching funds to the states
for Medicaid reimbursement purposes, based partly on provider assessments. Implementation of a
provider assessment plan requires approval by CMS in order to qualify for federal matching funds.
These plans usually take the form of a bed tax or quality assessment fee, which is imposed
uniformly across classes of providers within the state. In turn, the state generally utilizes the
additional federal matching funds generated by the assessment to pay increased reimbursement rates
to the providers, which often include repayment of a portion of the
27
provider assessment based on
the provider’s percentage of Medicaid patients. In January 2005, CMS approved the Pennsylvania
provider assessment, retroactive to July 1, 2003. The provider assessment is recorded in operating
expenses. The associated Medicaid rate increase is recorded in revenues.
Revenues from our long-term care segment, excluding the prior-year revenues associated with
provider assessments, increased $167.8 million, or 6 percent, due to increases in rates/patient mix
of $155.3 million and occupancy of $32.9 million that were partially offset by a decrease in
capacity of $20.4 million. Our revenues from the hospice and home health segment increased $84.5
million, or 21 percent, primarily from an increase in the number of patients utilizing our hospice
services.
We received rate increases for the long-term care segment from Medicare, Medicaid and private pay
sources. Our average Medicare rate increased 6 percent from $362 per day in 2005 to $385 per day
in 2006. As discussed in the Results of Operations – Overview above, we previously expected our
average Medicare rate to decrease $17 to $20 per day in the first quarter of 2006 as a result of
the expiration of payment add-ons and new patient classification refinements. However, we offset
the rate decrease in 2006 with our continuing shift to higher-acuity and higher rate-category
patients. Our average Medicaid rate, excluding prior-period revenues, increased 4 percent from
$147 per day in 2005 to $153 per day in 2006. However, when taking into account the increase in
state provider assessments, the net Medicaid rate
increased approximately 3 percent compared with the prior year. Our average private and other
rates for our skilled nursing facilities increased 6 percent from $214 per day in 2005 to $227 per
day in 2006. The increase in overall rates was also a result of a shift in the mix of our patients
to a higher percentage of Medicare patients.
Our overall occupancy levels increased from 88 percent for 2005 to 89 percent for 2006. Excluding
start-up facilities, our occupancy levels remained constant at 89 percent for 2005 and 2006. Our
occupancy levels for skilled nursing facilities increased from 89 percent for 2005 to 90 percent
for 2006.
The decline in our bed capacity between 2005 and 2006 resulted primarily from the divestiture of
four facilities in 2005. The quality mix of revenues from Medicare, private pay and insured
patients that related to long-term care facilities and rehabilitation operations increased from 71
percent in 2005 to 72 percent in 2006.
Operating Expenses. Our operating expenses in 2006 increased $149.5 million, or 5 percent,
compared with 2005. Our operating expenses increased $196.4 million, or 7 percent, when excluding
the retroactive prior-year provider assessments of $46.9 million for several states, including
Pennsylvania, that were recorded in the first quarter of 2005. See the discussion of provider
assessments in the Revenues section.
28
Excluding the prior-year provider assessments in 2005, operating expenses from our long-term care
segment increased $122.1 million, or 5 percent, between 2005 and 2006. The largest portion of the
operating expense increase of $54.3 million related to labor costs. The other significant
operating expense increases included ancillary costs, excluding internal labor, of $32.2 million
and bad debt expense of $24.8 million. Ancillary costs, which include various types of therapies,
medical supplies and prescription drugs, increased as a result of our higher-acuity patients. Bad
debt expense increased primarily due to an increase in the aging of our accounts receivable.
Partially offsetting these increases was a decrease in our general and professional liability
expense of $7.4 million. Refer to our Critical Accounting Policies for additional discussion of
our general and professional liability costs.
Our operating expenses from our hospice and home health segment increased $72.1 million, or 22
percent. The increase related to labor costs of $41.7 million, other nursing care costs, including
medical equipment and supplies, of $12.9 million, and ancillary costs, including pharmaceuticals,
of $8.3 million. Our operating margin declined in the fourth quarter of 2006 because of additional
costs associated with the start-up of new offices and inpatient facilities.
General and Administrative Expenses. Our general and administrative expenses increased $31.7
million between 2005 and 2006. The costs associated with our stock-based compensation, deferred
compensation plans and non-qualified benefit plans represented $12.7 million of this amount. These
costs increased because of the requirement to expense stock options including stock option grants
that vested immediately as a result of an option reload feature, additional performance-vested
restricted stock, additional restricted stock units, our stock price increase of 18 percent in 2006
compared with 12 percent in 2005, and general stock market increases. See Note 13 to the
consolidated financial statements for additional discussion of stock-based compensation.
The other significant general and administrative expense in 2006 related to the termination of a
previously frozen defined benefit pension plan on December 31, 2006. As part of this process, we
made lump-sum distributions in the fourth quarter of 2006 to terminated vested participants who
elected this option. In the first quarter of 2007, we will make either lump-sum distributions to
participants or transfer account balances to a licensed insurance company for all remaining vested
participants, based on the option elected by the participants. In accordance with Financial
Accounting Standards Board (FASB) Statement No. 88, “Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” these actions resulted
in a partial settlement in the fourth quarter of 2006 and will result in a full settlement in the
first quarter of 2007. The accounting rules do not allow recognition of the settlement until Manor
Care is relieved of its obligation. We recorded a pretax charge of $8.9 million ($5.7 million
after tax, or $.07 per share) in the fourth quarter of 2006, which included $7.4 million related to
the partial settlement, $1.2 million related to a reduced return on assets because of the transfer
of investments to money market funds, and the remainder related to the increased amortization of
the net actuarial loss. We expect the full settlement to result in a pretax charge of
approximately $25 million in the first quarter of 2007. At this time, we expect this pension
charge to be a non-cash charge, because the pension assets are sufficient to cover the pension
obligations. See Note 14 to
29
the consolidated financial statements for additional discussion of
employee benefit plans.
The remaining general and administrative expense increases related to wages, costs associated with
new computer systems and other inflationary costs.
Depreciation and Amortization. We recorded a $1.5 million adjustment to correct the
amortization of leasehold improvements in 2005. See Note 1 to our consolidated financial
statements for further discussion. Excluding the leasehold improvement adjustment, our
depreciation increased $8.5 million between 2005 and 2006, because of the completion of new
construction projects and renovations to existing facilities.
Asset Impairment. During the first quarter of 2006, we recorded a charge of $11.1 million
($7.0 million after tax, or $.09 per share) related to the write-down of our transcription business
assets, as explained in Note 2 to the consolidated financial statements. We decided to exit the
business and sold it in the fourth quarter of 2006, resulting in a $0.3 million decrease to our
previously recorded impairment charge.
During the third quarter of 2005, we recorded a charge of $2.5 million related to the write-off of
one leased facility’s assets, which related primarily to leasehold improvements. We concluded that
we would not be able to improve the facility’s cash flow to a level sufficient to justify the asset
value. We continue to operate this leased skilled nursing facility.
Interest Expense. Interest expense decreased $9.7 million between 2005 and 2006, because of
lower interest rates partially offset by higher debt levels. In May 2006, we issued $250 million
principal amount of 2.0% Convertible Senior Notes due in 2036. See Note 6 to the consolidated
financial statements for additional discussion of our debt issuance.
Early Extinguishment of Debt. During 2005, we redeemed the remaining $100 million of our
subsidiary’s 7.5% Senior Notes and $150 million of our 8% Senior Notes. In conjunction with the
redemption of these notes, we recorded expenses of $18.6 million. These expenses included
make-whole payments of $12.3 million for early redemption of the notes and unwind fees of $5.6
million related to the termination of the interest rate swap agreements.
Gain on Sale of Assets. Our gain on sale of assets in 2005 related primarily to a $17.6
million gain from the sale of three, non-strategic skilled nursing facilities in New Mexico.
Interest Income and Other. Our interest income was higher in 2005, primarily as a result of
the short-term investment of our cash and cash equivalents.
Income Taxes. Our effective tax rate was 36.4 percent in 2006, compared with 37.5 percent in
2005. Our effective tax rate was lower in 2006 primarily because of the favorable resolution of
prior years’ estimated federal and state tax liabilities. During 2006, the Internal
30
Revenue
Service completed an examination of our federal tax returns for 2002 through 2004. We expect our
2007 tax rate to be comparable to 2005.
Cumulative Effect of Change in Accounting Principle. The cumulative effect of the change in
accounting for stock appreciation rights, or SARs, of $4.0 million ($2.5 million after tax, or $.03
per share) was a result of the adoption of FASB Statement No. 123R, “Share-Based Payment”
(Statement 123R), as discussed in Note 13 to the consolidated financial statements. We were
required to change our measurement method for our SARs liability from intrinsic value to fair value
on January 1, 2006.
Inflation. We believe that inflation has had only an immaterial impact on our results of
operations.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
Revenues. Our revenues increased $208.4 million, or 6 percent, from 2004 to 2005. The
increase included revenues of $63.2 million in the first quarter of 2005 associated with provider
assessments. Revenues from our long-term care segment (skilled nursing and assisted living
facilities), excluding revenues in the first quarter associated with provider assessments,
increased $122.5 million, or 5 percent, due to increases in rates/patient mix of $219.7 million and
occupancy of $17.5 million that were partially offset by a decrease in capacity of $114.7 million.
Our revenues from the hospice and home health segment increased $10.9 million, or 3 percent,
primarily because of an increase in the number of patients utilizing our hospice services.
Our rate increases for the long-term care segment related to Medicare, Medicaid and private pay
sources. Our average Medicare rate increased 6 percent from $340 per day in 2004 to $362 per day
in 2005. Our Medicare rate increased as a result of inflationary increases, as described in the
Overview, as well as a shift to higher-acuity Medicare patients. Our average Medicaid rate,
excluding prior-period revenues, increased 8 percent from $136 per day in 2004 to $147 per day in
2005. However, when taking into account the increase in state provider assessments, the net
Medicaid rate increased approximately 1 percent compared with the prior year. Our average private
and other rates for our skilled nursing facilities increased 7 percent
from $200 per day in 2004 to $214 per day in 2005. The increase in overall rates was also a result
of a shift in the mix of our patients to a higher percentage of Medicare patients.
Our occupancy levels remained constant at 88 percent for 2004 and 2005. Excluding start-up
facilities, our occupancy levels were 88 percent for 2004 and 89 percent for 2005. Our occupancy
levels for skilled nursing facilities remained constant at 89 percent for 2004 and 2005.
Our bed capacity declined between 2004 and 2005, primarily because of the divestiture of facilities
in 2004 and 2005 (see our table in the Overview). The quality mix of revenues from Medicare,
private pay and insured patients that related to long-term care facilities and rehabilitation
operations
31
was 69 percent in 2004 compared with 71 percent in 2005.
Operating Expenses. Our operating expenses increased $172.6 million, or 7 percent, from 2004
to 2005. The increase included provider assessments for several states of $57.5 million in the
first quarter of 2005.
Excluding provider assessments in the first quarter of 2005, operating expenses from our long-term
care segment increased $87.5 million, or 4 percent, between 2004 and 2005. The largest portion of
the long-term care operating expense increase related to ancillary costs for higher-acuity
patients, excluding internal labor, of $63.9 million and provider assessments of $27.2 million.
Ancillary costs, which include various types of therapies, medical supplies and prescription drugs,
increased as a result of our more medically complex patients. Partially offsetting these increases
were decreases in labor costs of $20.0 million and general and professional liability expense of
$5.9 million. Our labor costs declined due to the divestiture of facilities in 2004. Our average
wage rates increased 3.5 percent compared with 2004. Refer to our Critical Accounting Policies for
additional discussion of our general and professional liability costs.
Our operating expenses from our hospice and home health segment increased $21.1 million, or 7
percent, between 2004 and 2005. During the first quarter of 2005, our hospice and home health
segment was reorganized in preparation for future growth. We appointed a new general manager and
new divisional and regional management. Margins declined this year primarily due to an increase in
labor costs of $11.8 million. In addition, other direct nursing care costs, including medical
equipment and supplies, increased $4.3 million.
General and Administrative Expenses. Our general and administrative expenses increased $23.6
million from 2004 to 2005. The costs associated with our stock appreciation rights, restricted
stock, non-qualified defined benefit plans and deferred compensation plans increased $16.1 million.
Our restricted stock expense was higher than 2004 because of awards of performance-vested
restricted stock in 2005 and the acceleration of the expense for time-vested restricted stock as
discussed in more detail in Note 13 to the consolidated financial statements. The remaining
increases related to wages, training costs associated with new computer systems and other general
inflationary costs.
Depreciation and Amortization. Our depreciation expense increased $10.6 million from 2004 to
2005. We recorded a $1.5 million adjustment to correct the amortization of leasehold improvements
in 2005. See Note 1 to our consolidated financial statements for further discussion. Excluding
the leasehold
improvement adjustment and the impact of divested facilities in 2004 and 2005, depreciation expense
increased $11.5 million, because of new construction projects and renovations to existing
facilities.
Early Extinguishment of Debt. During 2004, we purchased $50 million of our subsidiary’s 7.5%
Senior Notes and $50 million of our 8% Senior Notes, pursuant to cash tender offers. We
32
recorded
costs of $11.2 million related to these tender offers, including a prepayment premium of $10.5
million, fees and expenses of $0.4 million, and the write-off of deferred financing costs of $0.3
million.
Gain on Sale of Assets. Our gain on sale of assets in 2004 resulted primarily from the sale
of 15 facilities and certain other assets.
Equity in Earnings of Affiliated Companies. Our equity earnings decreased from 2004 to 2005
primarily because of the decline in earnings from our ownership interests in two hospitals.
Income Taxes. Our effective tax rate was 37.5 percent in 2005, compared with 34.0 percent in
2004. Our effective tax rate was lower in 2004 primarily because of the adjustment of prior years’
estimated federal and state tax liabilities. In 2004, the Internal Revenue Service completed the
examination of our federal income tax returns through 2001.
Inflation. We believe that inflation has had only an immaterial impact on our results of
operations.
Financial Condition — December 31, 2006 and 2005
Receivables increased $71.2 million, primarily because of a delay in the receipt of certain states’
Medicaid payments and the increase in Medicare receivables as a result of the increase in number of
patients and increase in rates for our hospice agencies and skilled nursing centers.
As described in Note 14 to our consolidated financial statements, we adopted FASB Statement No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132R” (Statement 158) on December 31, 2006.
Statement 158 requires an employer to recognize a plan’s funded status on its consolidated balance
sheet and recognize as a component of other comprehensive loss, net of tax, the gains or losses and
prior service costs or credits that arise during the period, but are not recognized as components
of net periodic benefit costs (referred to below as unrecognized items). The adoption of Statement
158 had no effect on our consolidated statement of income for the year ended December 31, 2006, or
for any prior period presented, and it will not affect operating results in future periods. The
incremental effects of adopting the provisions of Statement 158 were changes to the following
balance sheet line items:
| |
¨ |
|
Decrease intangible assets by $9.0 million to a balance of zero, because Statement
158 eliminates the need to recognize intangible assets, |
| |
| |
¨ |
|
Decrease other long-term assets by $25.4 million to a balance of $1.2 million,
because the long-term asset now represents the overfunded status of the terminated
pension plan, and the unrecognized items related to this plan are required to be
included in accumulated other comprehensive loss, |
| |
| |
¨ |
|
Decrease non-current deferred income taxes by $16.1 million to record the tax
benefit |
33
| |
|
|
on the unrecognized items that are included in equity net of tax, |
| |
| |
¨ |
|
Increase other long-term liabilities by $10.4 million to a balance of $30.4 million,
because the long-term liability represents the underfunded or unfunded obligation of
three plans, and the unrecognized items related to these plans are required to be
included in accumulated other comprehensive loss, and |
| |
| |
¨ |
|
Increase accumulated other comprehensive loss by $28.6 million to a balance of $29.2
million, because the unrecognized items, net of tax, are recorded in equity until the
items are recognized in the income statement. |
Long-term debt increased as a result of the issuance of $250 million of Convertible Senior Notes in
May 2006.
New
Accounting Standards
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will
adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be
recorded as an adjustment to retained earnings as of January 1, 2007. We expect the adoption of
FIN 48 to reduce retained earnings by less than $1.0 million.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (Statement 157).
Statement 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. Statement
157 applies under other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this statement does not require any new fair value
measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007.
Management is in the process of evaluating the impact of adopting Statement 157.
Capital Resources and Liquidity
Cash Flows. During 2006, we satisfied our cash requirements primarily with cash generated
from operating activities and issuance of Convertible Senior Notes. We used the cash principally
for capital expenditures, acquisitions, the purchase of our common stock and the payment of
dividends. Cash flows from operating activities were $275.2 million for 2006, compared with $353.9
million for 2005. Our operating cash flows in 2006 included an increase in accounts receivable due
to delay in certain states’ Medicaid payments and an increase in Medicare days and rates. We paid
$57.0 million more in income tax payments for 2006 than for 2005. We
34
estimate that our income tax
payments will increase by approximately $50 million in 2007. Our operating cash flows in 2005
included Medicare settlement payments of $34.1 million related to the 1997 through 1999 home office
cost reports of a predecessor entity, which are recorded as receivables and are under appeal.
Investing Activities. Our expenditures for property and equipment of $148.7 million in 2006
included $57.0 million to construct new facilities and expand existing facilities. We opened our
first freestanding hospice facility in the second quarter of 2006. We purchased two hospice
businesses and a rehabilitation business in 2006. We also invested additional funds in our
pharmacy partnership. In 2007, we expect our property, equipment and systems development
expenditures to approximate $165 million, because of routine capital improvements, new facility
construction, bed and therapy expansions, and the continuing upgrade of our financial and clinical
information systems in our skilled nursing centers and hospice and home care agencies.
Debt Agreements. In June 2006, we amended our five-year, $300 million revolving credit
facility. The amendment increased our unsecured credit availability by $100 million to $400
million, while maintaining our uncommitted option to increase the facility by up to an additional
$100 million (accordion feature). The amendment also extended the expiration date to June 22, 2011
and decreased the interest rate margin and facility fee. As of December 31, 2006, there was $36.0
million outstanding under this facility. After consideration of usage for letters of credit,
$318.0 million, plus the accordion feature, was available for future borrowing.
In May 2006, we issued $250 million of 2.0% Convertible Senior Notes due 2036. The net proceeds
were $244.3 million, after deducting fees and expenses. We used the net proceeds to purchase our
common stock, as discussed below. See Note 6 to the consolidated financial statements for further
discussion of our debt issuance.
The holders of our $100 million Convertible Senior Notes due 2023 have the ability to convert the
notes when the average of the last reported stock price for 20 trading days immediately prior to
conversion is greater than or equal to $37.34, which it was as of December 31, 2006. The holders
of $6.6 million principal amount of the Old Notes can convert their notes into shares of our common
stock. The holders of $93.4 million principal amount of the New Notes can convert their notes into
cash for the principal value and into shares of our common stock for the excess value, if any. See
Note 6 to our consolidated financial statements for a discussion of Old Notes and New Notes.
In addition, the holders of the $93.4 million principal amount of New Notes, the $400 million
principal amount of 2.125% Convertible Senior Notes, and the $250 million principal amount of 2.0%
Convertible Senior Notes may require us to convert or repurchase their notes upon the occurrence of
certain events, a circumstance we currently view as remote. We are required to satisfy the
principal value in cash upon conversion or repurchase.
35
Our revolving credit agreement requires us to meet certain measurable financial ratio tests, to
refrain from certain prohibited transactions (such as certain liens, larger-than-permitted
dividends, stock redemptions and asset sales), and to fulfill certain affirmative obligations (such
as paying taxes when due and maintaining properties and licenses). We met all covenants at
December 31, 2006. None of our debt agreements permit the lenders to determine in their sole
discretion that a material adverse change has occurred and either refuse to lend additional funds
or accelerate current loans. Our 6.25% Senior Note agreement contains a clause that is triggered
if we were to have a change-of-control that is immediately followed by a downgrade in debt rating
by either Standard & Poor’s Ratings Service or Moody’s Investors Service, Inc. If a
change-of-control were followed by a rating agency downgrade, we would be obligated to offer to
redeem the 6.25% Senior Notes. As long as we offer to make such
redemption, we will have satisfied the conditions of the 6.25% Senior Notes. Both Standard &
Poor’s Ratings Service and Moody’s Investors Service, Inc. maintain an investment grade rating for
our 6.25% Senior Notes, 2.125% Convertible Senior Notes due 2023, 2.125% Convertible Senior Notes
due 2035 and 2.0% Convertible Senior Notes due 2036.
Stock Purchase. At December 31, 2005, we had remaining authority to purchase $40.9 million of
our common stock. In January 2006, our Board of Directors authorized us to spend up to $100
million to purchase our common stock through December 31, 2006. In May 2006, our Board authorized
an additional $300 million to purchase our common stock through December 31, 2007. Utilizing these
authorizations, we purchased 7.0 million shares during 2006 for $328.8 million, including 2.0
million shares as part of an accelerated share repurchase agreement, as described in Note 12 to the
consolidated financial statements. As of December 31, 2006, we had $112.1 million remaining
authority to repurchase our shares. We may use the shares purchased for internal stock option and
401(k) match programs and for other uses, such as possible acquisitions.
Cash Dividends. On January 26, 2007, we announced that Manor Care will pay a quarterly cash
dividend of 17 cents per share to shareholders of record on February 12, 2007. This dividend will
approximate $12.4 million and is payable February 26, 2007. Although we currently intend to
declare and pay regular, quarterly cash dividends, there can be no assurance that any dividends
will be declared, paid or increased in the future.
We believe that our cash flow from operations will be sufficient to cover operating needs, future
capital expenditure requirements, scheduled debt payments of miscellaneous small borrowing
arrangements and capitalized leases, cash dividends and some share repurchases. Because of our
significant annual cash flow, we believe that we will be able to refinance the major pieces of our
debt as they mature. It is likely that we will pursue growth from acquisitions, partnerships and
other ventures that we would fund from excess cash from operations, credit available under our
revolving credit facility and other financing arrangements that are normally available in the
marketplace.
36
Contractual Obligations
The following table provides information about our contractual obligations at December 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Years |
|
| |
|
|
|
|
|
|
|
|
|
2008- |
|
|
2010- |
|
|
After |
|
| |
|
Total |
|
|
2007 |
|
|
2009 |
|
|
2011 |
|
|
2011 |
|
| |
|
(In thousands) |
|
Long-term debt, including
interest payments (1) |
|
$ |
1,128,051 |
|
|
$ |
33,454 |
|
|
$ |
65,716 |
|
|
$ |
552,631 |
|
|
$ |
476,250 |
|
Capital lease obligations |
|
|
12,188 |
|
|
|
1,718 |
|
|
|
1,136 |
|
|
|
863 |
|
|
|
8,471 |
|
Operating leases |
|
|
61,810 |
|
|
|
16,321 |
|
|
|
25,007 |
|
|
|
11,225 |
|
|
|
9,257 |
|
Internal construction projects |
|
|
4,878 |
|
|
|
4,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,206,927 |
|
|
$ |
56,371 |
|
|
$ |
91,859 |
|
|
$ |
564,719 |
|
|
$ |
493,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The long-term debt obligation includes the principal payments and interest
payments through the maturity date. For variable-rate debt, we have computed our obligation
based on the rates in effect at December 31, 2006 until maturity. For our $100 million
Convertible Senior Notes due 2023, the holders have the right to convert their notes at
December 31, 2006, because our stock price exceeded the required average price. Because we
have the ability and intent to finance the redemption with our revolving credit facility, we
are including the principal payment and assuming interest is paid through June 22, 2011
(maturity date of credit facility). For our $400 million Convertible Senior Notes due 2035,
the holders have the right to require us to purchase the notes on August 1, 2010. For our
$250 million Convertible Senior Notes due 2036, the holders have the right to require us to
purchase the notes on June 1, 2013. We are including the principal payment and assuming
interest is paid through these dates. |
In addition to our contractual obligations in the table above, we also have unfunded,
non-qualified defined contribution plans with obligations of $54.8 million, as well as long-term
senior executive retirement plan obligations, or SERP, of $45.7 million. We will be required to
make payments upon termination in a lump sum, or upon retirement in a lump sum or on an installment
basis. We have committed to release a portion of Manor Care’s share of the cash surrender value of
split-dollar life insurance arrangements, which totaled $24.9 million at December 31, 2006, to fund
the long-term SERP obligations, if necessary.
Off-Balance Sheet Arrangement
We lease our corporate headquarters under a synthetic lease, which provides a cost-effective means
of providing office space. The lease obligation includes the annual operating lease payments that
reflect interest-only payments on the lessor’s $22.8 million of underlying debt obligations, as
well as a residual guarantee of that amount at the maturity in 2009. At the
37
maturity of the lease,
our subsidiary will be obligated either to purchase the building by paying the $22.8 million of
underlying debt or to vacate the building and pay the difference, if any, between that amount and
the then fair market value of the building. We account for our synthetic lease as an operating
lease. The residual guarantee of $22.8 million is an off-balance sheet arrangement. We believe
that there is no deficiency related to its
guarantee at December 31, 2006.
Commitments and Contingencies
Letters of Credit. We had total letters of credit of $46.0 million at December 31, 2006 which
benefit certain third-party insurers, and 99 percent of these letters of credit were related to
recorded liabilities.
Environmental Liabilities. One or more subsidiaries or affiliates of Manor Care have been
identified as potentially responsible parties in a variety of actions relating to waste disposal
sites that allegedly are subject to remedial action under the federal Comprehensive Environmental
Response Compensation Liability Act, or CERCLA, and similar state laws. CERCLA imposes
retroactive, strict joint and several liability on potentially responsible parties for the costs of
hazardous waste clean-up. The actions arise out of the alleged activities of Cenco, Incorporated
and its subsidiary and affiliated companies. Cenco was acquired in 1981 by a wholly owned
subsidiary of Manor Care. The actions allege that Cenco transported or generated hazardous
substances that came to be located at the sites in question. Environmental proceedings may involve
owners and/or operators of the hazardous waste site, multiple waste generators and multiple waste
transportation disposal companies. These proceedings involve efforts by governmental entities or
private parties to allocate or recover site investigation and clean-up costs, which costs may be
substantial. We cannot quantify with precision the potential liability exposure for currently
pending environmental claims and litigation, without regard to insurance coverage, because of the
inherent uncertainties of litigation and because the ultimate cost of the remedial actions for some
of the waste disposal sites where subsidiaries or affiliates of Manor Care are alleged to be a
potentially responsible party has not yet been determined. At December 31, 2006, we had $4.8
million accrued in other long-term liabilities based on our current assessment of the likely
outcome of the actions. The amount of our reserve is based on our continual monitoring of the
litigation activity, estimated clean-up costs and the portion of the liability for which we are
responsible. At December 31, 2006, there were no receivables related to insurance recoveries.
General and Professional Liability. We are party to various other legal matters arising in
the ordinary course of business, including patient care-related claims and litigation. At December
31, 2006, the general and professional liability consisted of short-term reserves of $61.7 million
and long-term reserves of $109.0 million. We can give no assurance that this liability will not
require material adjustment in future periods.
38
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events. We identify forward-looking
statements in this report by using words or phrases such as “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “may be,” “objective,” “plan,” “predict,” “project,” “will be” and similar
words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties.
Factors which may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by us in those statements
include, among others, the following:
| |
¨ |
|
Changes in the health care industry because of political and economic influences; |
| |
| |
¨ |
|
Changes in Medicare, Medicaid and certain private payors’ reimbursement levels or
coverage requirements; |
| |
| |
¨ |
|
Existing government regulations and changes in, or the failure to comply with,
governmental regulations or the interpretations thereof; |
| |
| |
¨ |
|
Changes in current trends in the cost and volume of patient care-related claims and
workers’ compensation claims and in insurance costs related to such claims; |
| |
| |
¨ |
|
The ability to attract and retain qualified personnel; |
| |
| |
¨ |
|
Our existing and future debt which may affect our ability to obtain financing in the
future or compliance with our debt covenants; |
| |
| |
¨ |
|
Our ability to maintain or increase our occupancy levels in our skilled nursing and
assisted living facilities; |
| |
| |
¨ |
|
Our ability to maintain or increase our revenues in our hospice and home health care
and rehabilitation businesses; |
| |
| |
¨ |
|
Our ability to control operating costs; |
| |
| |
¨ |
|
Integration of acquired businesses; |
| |
| |
¨ |
|
Changes in, or the failure to comply with, regulations governing the transmission
and privacy of health information; |
| |
| |
¨ |
|
State regulation of the construction or expansion of health care providers; |
| |
| |
¨ |
|
Legislative proposals for health care reform; |
39
| |
¨ |
|
Competition; |
| |
| |
¨ |
|
The failure to comply with Medicare and Medicaid program requirements, occupational
health and safety regulations, and other applicable federal and state laws, rules and
regulations; |
| |
| |
¨ |
|
The ability to enter into managed care provider arrangements on acceptable terms; |
| |
| |
¨ |
|
Litigation; |
| |
| |
¨ |
|
A reduction in cash reserves and shareholders’ equity upon our repurchase of our
stock; |
| |
| |
¨ |
|
An increase in senior debt or reduction in cash flow upon our purchase or sale of
assets; and |
| |
| |
¨ |
|
Conditions in the financial markets. |
Although we believe the expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these expectations or that any
deviations will not be material. Except as otherwise required by the federal securities laws, we
disclaim any obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any such statement is
based.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Changes in U.S. interest rates expose us to market risks inherent with derivatives and other
financial instruments. Our interest expense is most sensitive to changes in the general level of
U.S. interest rates applicable to our U.S. dollar indebtedness. During 2006, we issued $250
million of 2.0% Convertible Senior Notes due 2036. As of December 31, 2006, outstanding borrowings
totaled $36.0 million under our revolving credit facility.
The table below provides information about our debt obligations that are sensitive to changes in
interest rates. The table presents principal cash flows and weighted-average interest rates by
expected maturity dates. We assume the holders of our $100 million and $400 million Convertible
Senior Notes will not require us to redeem or convert the notes through 2010, and we do not expect
to redeem them in 2010. Therefore, we have included both of these notes in the Thereafter column.
Neither we nor the holders of our $250 million Convertible Senior Notes can redeem the notes until
2013.
40
The following table provides information about our significant interest rate risk at December
31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
| |
|
Expected Maturity Dates |
|
|
|
|
|
Dec. 31, |
| |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
2006 |
| |
|
(Dollars in thousands) |
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
949,983 |
|
|
$ |
949,983 |
|
|
$ |
1,068,989 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate debt |
|
$ |
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,000 |
|
|
$ |
36,000 |
|
Average interest rate |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
|
| (1) |
|
The weighted-average interest rate on loans under the revolving credit
facility was 6.1 percent at December 31, 2006. We can borrow under the revolving credit
facility, at our option, on either a competitive advance basis or a revolving credit basis.
Competitive borrowings will bear interest at market rates on either a fixed- or floating-rate
basis, at our option. Revolving borrowings will bear interest at variable rates that reflect,
at our option, the agent bank’s base lending rate or an increment over Eurodollar indices,
which ranges from 0.275 to 0.50 percent per annum, depending on our leverage ratio, as defined
in the revolving credit facility. |
The following table provides information about our significant interest rate risk at December
31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
| |
|
Expected Maturity Dates |
|
|
|
|
|
Dec. 31, |
| |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
2005 |
| |
|
(Dollars in thousands) |
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
699,985 |
|
|
$ |
699,985 |
|
|
$ |
752,398 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate debt |
|
$ |
22,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,800 |
|
|
$ |
22,800 |
|
Average interest rate |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
|
| (1) |
|
The weighted-average interest rate on loans under the revolving credit
facility was 6.3 percent at December 31, 2005. We can borrow under the revolving credit
facility, at our option, on either a competitive advance basis or a revolving credit basis.
Competitive borrowings will bear interest at market rates on either a fixed- or floating-rate
basis, at our option. Revolving borrowings will bear interest at variable rates that reflect,
at our option, the agent bank’s base lending rate or an increment over Eurodollar indices,
which ranges from 0.32 to 0.80 percent per annum, depending on our leverage ratio, as defined
in the revolving credit facility. |
41
Item 8. Financial Statements and Supplementary Data
| |
|
|
| |
|
Page |
|
|
43 |
|
|
44 |
|
|
45 |
|
|
46 |
|
|
47 |
|
|
48 |
|
|
81 |
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Manor Care, Inc.
We have audited the accompanying consolidated balance sheets of Manor Care, Inc. and subsidiaries
as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2006. Our
audits also include the financial statement schedule listed in the Index at Item 15. These
financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Manor Care, Inc. and subsidiaries at December 31,
2006 and 2005, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Manor Care, Inc.’s internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated January 30, 2007 expressed an unqualified opinion thereon.
As discussed in Notes 13 and 14 to the consolidated financial statements, in 2006 the Company
changed its method of accounting for stock-based compensation and defined benefit pension plans,
respectively.
/s/ Ernst & Young LLP
Toledo, Ohio
January 30, 2007
43
Manor
Care, Inc.
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(In thousands, except per share data) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,658 |
|
|
$ |
12,293 |
|
Receivables, less allowances for doubtful
accounts of $74,644 and $60,726, respectively |
|
|
565,831 |
|
|
|
494,620 |
|
Prepaid expenses and other assets |
|
|
34,924 |
|
|
|
24,416 |
|
Deferred income taxes |
|
|
781 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
619,194 |
|
|
|
531,329 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
1,493,576 |
|
|
|
1,484,475 |
|
Goodwill |
|
|
132,997 |
|
|
|
103,357 |
|
Intangible assets, net of amortization of $1,862 and $3,309, respectively |
|
|
5,782 |
|
|
|
20,012 |
|
Other assets |
|
|
146,928 |
|
|
|
200,061 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,398,477 |
|
|
$ |
2,339,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
120,621 |
|
|
$ |
112,952 |
|
Employee compensation and benefits |
|
|
165,001 |
|
|
|
157,002 |
|
Accrued insurance liabilities |
|
|
109,538 |
|
|
|
108,275 |
|
Income tax payable |
|
|
10,118 |
|
|
|
4,936 |
|
Other accrued liabilities |
|
|
79,904 |
|
|
|
62,938 |
|
Deferred income taxes |
|
|
|
|
|
|
3,633 |
|
Long-term debt due within one year |
|
|
38,447 |
|
|
|
25,435 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
523,629 |
|
|
|
475,171 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
955,211 |
|
|
|
707,666 |
|
Deferred income taxes |
|
|
78,741 |
|
|
|
102,919 |
|
Other liabilities |
|
|
267,703 |
|
|
|
279,755 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 5 million shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued |
|
|
1,110 |
|
|
|
1,110 |
|
Capital in excess of par value |
|
|
407,506 |
|
|
|
364,845 |
|
Retained earnings |
|
|
1,437,145 |
|
|
|
1,319,162 |
|
Accumulated other comprehensive loss |
|
|
(29,217 |
) |
|
|
(978 |
) |
|
|
|
|
|
|
|
|
|
|
1,816,544 |
|
|
|
1,684,139 |
|
Less treasury stock, at cost (38.3 and 32.3 million
shares, respectively) |
|
|
(1,243,351 |
) |
|
|
(910,416 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
573,193 |
|
|
|
773,723 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
2,398,477 |
|
|
$ |
2,339,234 |
|
|
|
|
|
|
|
|
See
accompanying notes.
44
Manor Care, Inc.
Consolidated Statements of Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands, except per share data) |
|
Revenues |
|
$ |
3,613,185 |
|
|
$ |
3,417,290 |
|
|
$ |
3,208,867 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
2,969,887 |
|
|
|
2,820,431 |
|
|
|
2,647,849 |
|
General and administrative |
|
|
195,906 |
|
|
|
164,189 |
|
|
|
140,587 |
|
Depreciation and amortization |
|
|
145,379 |
|
|
|
139,203 |
|
|
|
127,821 |
|
Asset impairment |
|
|
10,792 |
|
|
|
2,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,321,964 |
|
|
|
3,126,274 |
|
|
|
2,916,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income (expenses) and
income taxes |
|
|
291,221 |
|
|
|
291,016 |
|
|
|
292,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(31,513 |
) |
|
|
(41,240 |
) |
|
|
(42,420 |
) |
Early extinguishment of debt |
|
|
|
|
|
|
(18,634 |
) |
|
|
(11,160 |
) |
Gain (loss) on sale of assets |
|
|
(210 |
) |
|
|
16,431 |
|
|
|
6,400 |
|
Equity in earnings of affiliated companies |
|
|
5,776 |
|
|
|
5,492 |
|
|
|
6,975 |
|
Interest income and other |
|
|
1,284 |
|
|
|
4,607 |
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
|
(24,663 |
) |
|
|
(33,344 |
) |
|
|
(37,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
266,558 |
|
|
|
257,672 |
|
|
|
254,879 |
|
Income taxes |
|
|
96,998 |
|
|
|
96,717 |
|
|
|
86,657 |
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect |
|
|
169,560 |
|
|
|
160,955 |
|
|
|
168,222 |
|
Cumulative effect of change in accounting
principle, net of tax |
|
|
(2,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
167,084 |
|
|
$ |
160,955 |
|
|
$ |
168,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect |
|
$ |
2.24 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
Cumulative effect |
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.21 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect |
|
$ |
2.17 |
|
|
$ |
1.89 |
|
|
$ |
1.90 |
|
Cumulative effect |
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.14 |
|
|
$ |
1.89 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
75,618 |
|
|
|
83,269 |
|
|
|
86,762 |
|
Diluted |
|
|
78,285 |
|
|
|
85,044 |
|
|
|
88,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
.64 |
|
|
$ |
.60 |
|
|
$ |
.56 |
|
See
accompanying notes.
45
Manor Care, Inc.
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
167,084 |
|
|
$ |
160,955 |
|
|
$ |
168,222 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
145,379 |
|
|
|
139,203 |
|
|
|
127,821 |
|
Asset impairment and other non-cash charges |
|
|
14,760 |
|
|
|
2,451 |
|
|
|
|
|
Stock options and restricted stock compensation |
|
|
20,394 |
|
|
|
11,243 |
|
|
|
1,908 |
|
Early extinguishment of debt |
|
|
|
|
|
|
18,634 |
|
|
|
11,160 |
|
Provision for bad debts |
|
|
59,334 |
|
|
|
34,665 |
|
|
|
30,124 |
|
Deferred income taxes |
|
|
(11,416 |
) |
|
|
58,769 |
|
|
|
6,357 |
|
Net (gain) loss on sale of assets |
|
|
210 |
|
|
|
(16,431 |
) |
|
|
(6,400 |
) |
Equity in earnings of affiliated companies |
|
|
(5,776 |
) |
|
|
(5,492 |
) |
|
|
(6,975 |
) |
Changes in assets and liabilities, excluding sold
facilities and acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(135,914 |
) |
|
|
(103,060 |
) |
|
|
(48,559 |
) |
Prepaid expenses and other assets |
|
|
17,585 |
|
|
|
11,074 |
|
|
|
4,356 |
|
Liabilities |
|
|
3,544 |
|
|
|
41,937 |
|
|
|
41,752 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
108,100 |
|
|
|
192,993 |
|
|
|
161,544 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
275,184 |
|
|
|
353,948 |
|
|
|
329,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in property and equipment |
|
|
(148,742 |
) |
|
|
(135,007 |
) |
|
|
(151,071 |
) |
Investment in systems development |
|
|
(3,339 |
) |
|
|
(2,674 |
) |
|
|
(2,516 |
) |
Investment in partnership |
|
|
(10,056 |
) |
|
|
|
|
|
|
|
|
Acquisitions |
|
|
(20,983 |
) |
|
|
(8,685 |
) |
|
|
(4,025 |
) |
Proceeds from sale of assets |
|
|
4,371 |
|
|
|
27,909 |
|
|
|
55,031 |
|
Proceeds from sale of minority interests in consolidated entity |
|
|
|
|
|
|
|
|
|
|
2,778 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(178,749 |
) |
|
|
(118,457 |
) |
|
|
(99,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit facility |
|
|
13,200 |
|
|
|
22,800 |
|
|
|
|
|
Proceeds from issuance of senior notes |
|
|
250,000 |
|
|
|
400,000 |
|
|
|
|
|
Principal payments of long-term debt |
|
|
(2,643 |
) |
|
|
(252,496 |
) |
|
|
(107,075 |
) |
Net payment of convertible note hedge and
warrant option transactions |
|
|
|
|
|
|
(53,800 |
) |
|
|
|
|
Payment of financing costs and debt prepayment premium |
|
|
(5,975 |
) |
|
|
(28,226 |
) |
|
|
(11,181 |
) |
Purchase of common stock for treasury |
|
|
(328,791 |
) |
|
|
(316,363 |
) |
|
|
(135,564 |
) |
Dividends paid |
|
|
(48,913 |
) |
|
|
(50,286 |
) |
|
|
(49,306 |
) |
Proceeds from exercise of stock options |
|
|
14,731 |
|
|
|
22,258 |
|
|
|
19,827 |
|
Excess tax benefits from share-based payment arrangements |
|
|
17,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(91,070 |
) |
|
|
(256,113 |
) |
|
|
(283,299 |
) |
|
|
|
|
|
|
|
|
|
|
| |
Net increase (decrease) in cash and cash equivalents |
|
|
5,365 |
|
|
|
(20,622 |
) |
|
|
(53,336 |
) |
Cash and cash equivalents at beginning of period |
|
|
12,293 |
|
|
|
32,915 |
|
|
|
86,251 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
17,658 |
|
|
$ |
12,293 |
|
|
$ |
32,915 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
46
Manor Care, Inc.
Consolidated Statements of Shareholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Capital |
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Common |
|
|
in Excess |
|
|
Retained |
|
|
Income |
|
|
Treasury Stock |
|
|
Shareholders’ |
|
| |
|
Stock |
|
|
of Par Value |
|
|
Earnings |
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
| |
|
(In thousands, except per share data) |
|
Balance at January 1, 2004 |
|
$ |
1,110 |
|
|
$ |
357,832 |
|
|
$ |
1,089,577 |
|
|
$ |
(662 |
) |
|
|
(22,019 |
) |
|
$ |
(472,752 |
) |
|
$ |
975,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue and vesting of restricted stock |
|
|
|
|
|
|
(752 |
) |
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
2,660 |
|
|
|
1,908 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,446 |
) |
|
|
(145,269 |
) |
|
|
(145,269 |
) |
Exercise of stock options |
|
|
|
|
|
|
2,818 |
|
|
|
|
|
|
|
|
|
|
|
1,289 |
|
|
|
24,495 |
|
|
|
27,313 |
|
Tax benefit from stock transactions |
|
|
|
|
|
|
6,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,751 |
|
Cash dividends declared ($.56 per share) |
|
|
|
|
|
|
|
|
|
|
(49,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,306 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
168,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss),
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments and
reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of derivative loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
1,110 |
|
|
|
366,649 |
|
|
|
1,208,493 |
|
|
|
(1,227 |
) |
|
|
(25,043 |
) |
|
|
(590,866 |
) |
|
|
984,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue and vesting of restricted stock |
|
|
|
|
|
|
2,476 |
|
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
4,665 |
|
|
|
7,141 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,212 |
) |
|
|
(349,536 |
) |
|
|
(349,536 |
) |
Exercise of stock options |
|
|
|
|
|
|
10,105 |
|
|
|
|
|
|
|
|
|
|
|
1,665 |
|
|
|
25,321 |
|
|
|
35,426 |
|
Tax benefit from stock transactions |
|
|
|
|
|
|
10,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,092 |
|
Cash dividends declared ($.60 per share) |
|
|
|
|
|
|
|
|
|
|
(50,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,286 |
) |
Convertible note hedge and warrant,
net of $29.3 million tax benefit |
|
|
|
|
|
|
(24,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,477 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
160,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of derivative loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
1,110 |
|
|
|
364,845 |
|
|
|
1,319,162 |
|
|
|
(978 |
) |
|
|
(32,304 |
) |
|
|
(910,416 |
) |
|
|
773,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of Statement 123R |
|
|
|
|
|
|
4,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,102 |
|
Stock-based compensation |
|
|
|
|
|
|
20,635 |
|
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,447 |
|
Issue of common and restricted stock |
|
|
|
|
|
|
(2,152 |
) |
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
2,152 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,302 |
) |
|
|
(387,337 |
) |
|
|
(387,337 |
) |
Exercise of stock options |
|
|
|
|
|
|
2,769 |
|
|
|
|
|
|
|
|
|
|
|
2,207 |
|
|
|
52,250 |
|
|
|
55,019 |
|
Tax benefit from stock transactions |
|
|
|
|
|
|
17,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,307 |
|
Cash dividends declared ($.64 per share) |
|
|
|
|
|
|
|
|
|
|
(48,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,913 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
167,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,442 |
|
Adoption of Statement 158, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,597 |
) |
|
|
|
|
|
|
|
|
|
|
(28,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
1,110 |
|
|
$ |
407,506 |
|
|
$ |
1,437,145 |
|
|
$ |
(29,217 |
) |
|
|
(38,273 |
) |
|
$ |
(1,243,351 |
) |
|
$ |
573,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
47
Manor Care, Inc.
Notes to Consolidated Financial Statements
1. Accounting Policies
Nature of Operations
Manor Care, Inc. (the Company) is a provider of a range of health care services, including skilled
nursing care, assisted living, post-acute medical and rehabilitation care, hospice care, home
health care and rehabilitation therapy. The most significant portion of the Company’s business
relates to skilled nursing care and assisted living, operating 343 centers in 30 states, with 62
percent located in Florida, Illinois, Michigan, Ohio and Pennsylvania. The hospice and home health
business specializes in all levels of hospice care, home health and rehabilitation therapy, with
116 offices located in 25 states. The Company provides rehabilitation therapy in nursing centers
of its own and others, and in the Company’s 92 outpatient therapy clinics serving the Midwestern
and Mid-Atlantic states, Texas and Florida.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries. Significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company uses the equity method to account for investments in entities in which it has less than
a majority interest but can exercise significant influence. These investments are classified on
the accompanying balance sheets as other long-term assets and amounted to $70.6 million and $56.7
million at December 31, 2006 and 2005, respectively. Under the equity method, the investment,
originally recorded at cost, is adjusted to recognize the Company’s share of the net earnings or
losses of the affiliate as they occur. Losses are limited to the extent of the Company’s
investments in, advances to and guarantees for the entity. The Company had three significant
equity investments at December 31, 2006. The Company has a 50 percent ownership and voting
interest in a pharmacy partnership, with Omnicare, Inc. having the remaining interest. The Company
has a 20 percent ownership and voting interest in two separate hospitals, with an affiliate of
Health Management Associates, Inc. having the remaining interest.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
Investments with a maturity of three months or less when purchased are considered cash equivalents
for purposes of the statements of cash flows.
48
Receivables and Revenues
Revenues are derived from services rendered to patients for long-term care, including skilled
nursing and assisted living services, hospice and home health care, and rehabilitation therapy.
Revenues are recorded when services are provided based on established rates adjusted to amounts
expected to be received under governmental programs and other third-party contractual arrangements
based on contractual terms. These revenues and receivables are stated at amounts estimated by
management to be the net realizable value.
For private pay patients in skilled nursing or assisted living facilities, the Company bills in
advance for the following month, with the remittance being due on the 10th day of the
month the services are performed. A portion of the episodic Medicare payments for home health
services are also received in advance of the services being rendered. All advance billings are
recognized as revenue when the services are performed.
Medicare program revenues prior to June 1999 for skilled nursing facilities and October 2000 for
home health agencies, as well as certain Medicaid program revenues, are subject to audit and
retroactive adjustment by government representatives. Retroactive adjustments are estimated in the
recording of revenues in the period the related services are rendered. These amounts are adjusted
in future periods as adjustments become known or as cost reporting years are no longer subject to
audits or reviews. In the opinion of management, any differences between the net revenues recorded
and final determination will not materially affect the consolidated financial statements. Net
third-party settlements amounted to a $52.1 million and $59.5 million receivable at December 31,
2006 and 2005, respectively. The receivable at December 31, 2006 and 2005 included $34.1 million
in Medicare settlements paid in 2005 related to the 1997 through 1999 home office cost reports of a
predecessor entity, which were adjusted incorrectly by the intermediary and are under appeal.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. The Company believes that it is in material compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations involving material
allegations of potential wrongdoing. While no such regulatory inquiries have been made,
noncompliance with such laws and regulations can be subject to regulatory actions including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based on certain factors, such
as pay type, historical collection trends and aging categories. The percentage that is applied to
the receivable balances is based on the Company’s historical experience and time limits, if any,
for each particular pay source, such as private, other/insurance, Medicare and Medicaid.
49
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by the straight-line method
over the estimated useful lives of the assets, generally three to 20 years for equipment and
furnishings and 10 to 40 years for buildings and improvements.
Direct incremental costs are capitalized for major development projects and are amortized over the
lives of the related assets. The Company capitalizes interest on borrowings applicable to
construction in progress.
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Long-Term |
|
|
Hospice and |
|
|
|
|
|
|
|
| |
|
Care |
|
|
Home Health |
|
|
Other |
|
|
Total |
|
| |
|
(In thousands) |
|
Balance at January 1, 2005 |
|
$ |
9,166 |
|
|
$ |
27,578 |
|
|
$ |
55,928 |
|
|
$ |
92,672 |
|
Goodwill from acquisitions |
|
|
1,879 |
|
|
|
8,806 |
|
|
|
|
|
|
|
10,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
11,045 |
|
|
|
36,384 |
|
|
|
55,928 |
|
|
|
103,357 |
|
Goodwill from acquisitions |
|
|
923 |
|
|
|
19,350 |
|
|
|
9,367 |
|
|
|
29,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
11,968 |
|
|
$ |
55,734 |
|
|
$ |
65,295 |
|
|
$ |
132,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
Intangible assets of businesses acquired are amortized by the straight-line method over five years
for non-compete agreements and 40 years for management contracts.
Impairment of Property and Equipment, Intangible Assets and Goodwill
The carrying value of property and equipment and intangible assets is reviewed quarterly to
determine if facts and circumstances suggest that the assets may be impaired or that the useful
life may need to be changed. The Company considers internal and external factors relating to each
asset, including cash flow, contract changes, local market developments, national health care
trends and other publicly available information. If these factors and the projected undiscounted
cash flows of the business over the remaining useful life indicate that the asset will not be
recoverable, the carrying value will be adjusted to the estimated fair value. See Note 2 for
further discussion of impairment charges in 2006 and 2005.
The Company tests for the recoverability of goodwill annually on October 1, or sooner if events or
changes in circumstances indicate that the carrying amounts of the Company’s reporting units,
including goodwill, may exceed their fair values. The fair value of the reporting units is
determined by using cash flow analysis which projects the future cash flows
and discounts those cash flows to the present value. The projection of future cash flows is
dependent upon
50
assumptions regarding future levels of income, including changes in Medicare and
Medicaid reimbursement regulations. If the carrying value of a reporting unit exceeds the fair
value, the goodwill of the reporting unit is potentially impaired, subject to additional analysis.
In such a case, the Company may have to record a charge to its results of operations based on the
results of the additional analysis.
Lease Accounting
During 2005, the Company completed an assessment of its accounting for over 150 leases and related
amortization for leasehold improvements. Based on this assessment, the Company concluded that its
previous accounting practices related to escalating rent over the term of the lease, free rental
periods at the beginning of the lease and the leasehold amortization period were not correct.
Historically, the Company expensed the lease payment as it was paid, but should have amortized the
total lease payments on a straight-line basis over the lease term. The Company recorded a non-cash
charge of $4.5 million ($2.8 million after tax, or $.03 per share) that reflected the correction.
Of this amount, $3.0 million related to lease expense, consisting of $2.4 million of operating
expenses and $0.6 million of general and administrative expenses. The remaining $1.5 million
related to additional amortization of leasehold improvements. The Company retroactively changed
the estimated useful lives of the leasehold improvements to the lesser of the useful life or the
contractual term of the initial lease. The effect on the Company’s prior years’ earnings per share
was not material.
Systems Development Costs
Costs incurred for systems development include consulting costs. These costs are capitalized and
are amortized over the estimated useful lives of the related systems.
Investment in Life Insurance
Investment in corporate-owned life insurance policies is recorded net of policy loans in other
assets. The net life insurance expense, which includes premiums and interest on cash surrender
borrowings, net of all increases in cash surrender values, is included in operating expenses.
Insurance Liabilities
The Company purchases general and professional liability insurance and has maintained an
unaggregated self-insured retention per occurrence ranging from $0.5 million to $12.5 million,
depending on the policy year and state. In addition, for the policy period beginning June 1, 2004,
the Company formed a captive insurance entity to provide a coverage layer of $12.5 million in
excess of $12.5 million per claim. Provisions for estimated settlements, including incurred but
not reported claims, are provided on an undiscounted basis in the period to which the coverage
related. These provisions are based on internal and external evaluations of the merits of the
individual claims and an analysis of claim history. Based on the Company’s historical data and
review of recent claims, cost and other trends, management determines the appropriate reserve. Any
adjustments resulting from this review are reflected in current earnings. Claims are paid over
varying periods, which generally range from one to eight
years. See Note 10 for further discussion.
51
The Company’s workers’ compensation insurance consists of a combination of insured and self-insured
programs and limited participation in certain state programs. The Company is responsible for
$500,000 per occurrence for insured programs. The Company is responsible for $1,000,000 per
occurrence for self-insured programs and maintains insurance above this amount. The Company
records an estimated liability, including incurred but not reported claims, for losses attributable
to workers’ compensation claims based on internal evaluations and an analysis of claim history.
The estimates are based on loss claim data, trends and assumptions. Claims are paid over varying
periods and are generally fully paid within eight years. At December 31, 2006 and 2005, the
workers’ compensation liability consisted of short-term reserves of $21.0 million and $20.8
million, respectively, which were included in accrued insurance liabilities, and long-term reserves
of $37.0 million and $40.5 million, respectively, which were included in other long-term
liabilities. The expense for workers’ compensation was $22.4 million, $24.5 million and $26.6
million for the years ended December 31, 2006, 2005 and 2004, respectively, which amounts were
included in operating expenses.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred $15.0 million, $14.8 million
and $16.8 million in advertising costs for the years ended December 31, 2006, 2005 and 2004,
respectively.
Treasury Stock
The Company records the purchase of its common stock for treasury at cost. The treasury stock is
reissued on a first-in, first-out method. If the proceeds from reissuance of treasury stock exceed
the cost of the treasury stock, the excess is recorded in capital in excess of par value. If the
cost of the treasury stock exceeds the proceeds from reissuance of the treasury stock, the
difference is first charged against any excess previously recorded in capital in excess of par
value, and any remainder is charged to retained earnings.
Stock-Based Compensation
Compensation costs subject to graded vesting based on a service condition are amortized to expense
on the straight-line method.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income (income available to common
shareholders) by the weighted-average number of common shares outstanding during the period. The
numerator for diluted EPS is computed by adding net income and the after-tax amount of interest
expense on the Company’s Convertible Senior Notes accounted for under the if-converted method. The
denominator for diluted EPS includes the basic weighted-average shares as well as the potential
dilution that could occur upon exercise, vesting or assumed conversion of non-qualified stock
options, non-vested restricted stock units,
performance-vested restricted stock, contingently Convertible Senior Notes, warrants and forward
contracts. The Convertible Senior Notes that, upon conversion, provide for the total value of the
notes to be
52
settled in the Company’s common stock are included in diluted EPS under the
if-converted method. The Convertible Senior Notes that, upon conversion, provide for the principal
amount to be settled in cash and the excess value, if any, to be settled in the Company’s common
stock are included in diluted EPS under the treasury stock method when the average stock price
exceeds the conversion price. The warrants are included in diluted EPS under the treasury stock
method when the average price exceeds the conversion price. The forward contract related to the
Company’s accelerated share repurchase program was included in diluted EPS under the treasury stock
method during the third quarter of 2005 assuming share settlement, because the Company had no
previous practice or stated policy of settling in cash. The Company subsequently settled the
contract in cash, as discussed in Note 12.
Interest Rate Swap Agreements
Interest rate swap agreements are considered to be derivative financial instruments that must be
recognized on the balance sheet at fair value. The Company’s interest rate swap agreements have
been formally designated to hedge certain fixed-rate senior notes and are considered to be
effective fair value hedges based on meeting certain hedge criteria. The fair value of the
interest rate swap agreements affects only the balance sheet and is recorded as a non-current asset
or liability with an offsetting adjustment to the underlying senior note. The net interest amounts
paid or received and net amounts accrued through the end of the accounting period are included in
interest expense. Gains or losses on the termination of interest swap agreements in conjunction
with the early extinguishment of the designated debt obligation are recorded along with the
extinguishment gain or loss.
In 2003, the Company entered into interest rate swap agreements on a notional amount of $200
million in order to provide a better balance of fixed- and variable-rate debt. These fair value
hedge agreements effectively converted the interest rate on $100 million each of the Company’s 7.5%
and 8% Senior Notes to variable rates equal to six-month LIBOR plus a spread. During 2005, the
Company redeemed the remaining principal amount of the 7.5% and 8% Senior Notes and terminated the
related interest rate swap agreements.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN
48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1,
2007, as required. The cumulative effect of adopting FIN 48 will be recorded as an adjustment to
retained earnings as of January 1, 2007. The Company expects the adoption of FIN 48 to reduce
retained earnings by less than $1.0 million.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
53
(Statement 157).
Statement 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. Statement
157 applies under other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this statement does not require any new fair value
measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007.
Management is in the process of evaluating the impact of adopting Statement 157.
Reclassification
Certain reclassifications affecting long-term debt due within one year and long-term debt have been
made in the 2005 financial statements to conform with the 2006 presentation.
2. Asset Impairment
During the Company’s quarterly review of long-lived assets in the first quarter of 2006, management
determined that its medical transcription business should be written down by $11.1 million ($7.0
million after tax, or $.09 per share) based on its estimated realizable value. During March, the
Company was notified that its largest medical transcription customer would not agree to a price
increase, adversely affecting the future profitability of this business. The Company decided to
exit the business and sold it in the fourth quarter of 2006, resulting in a $0.3 million decrease
to its previously recorded impairment charge.
During the Company’s quarterly review of long-lived assets in 2005, management determined that one
leased facility’s net assets of $2.5 million should be written off. The majority of the assets
related to leasehold improvements. The Company changed facility management several times and tried
different marketing approaches. Management concluded it would not be able to improve the
facility’s cash flow to a level sufficient to justify the asset value. The Company continues to
operate this leased skilled nursing facility.
3. Acquisitions/Divestitures
During 2005, the Company sold three non-strategic skilled nursing facilities in New Mexico for
$26.5 million, realizing a gain of $17.6 million. In addition, the lease on one skilled nursing
facility was terminated. The results of operations of the divested facilities, excluding the gain
on sale, are not material to the consolidated results of operations.
During 2004, the Company divested 21 non-strategic long-term care facilities that it operated and
two facilities that had been leased to others. A total of 15 of these facilities were sold for
$52.7 million, realizing a net gain of $6.2 million. The remaining eight facilities were
divested as a result of lease expiration, lease assignment or conversion into a long-term acute
care hospital. The results of operations of the divested facilities are not material to the
consolidated results of operations.
54
The Company paid $21.0 million, $8.7 million and $4.0 million in 2006, 2005 and 2004, respectively,
for the acquisition of hospice and home health businesses and rehabilitation therapy businesses.
The acquisitions were accounted for under the purchase method of accounting. The results of
operations of the acquired businesses were included in the consolidated statements of income from
the date of acquisition. The pro forma consolidated results of operations would not be materially
different from the amounts reported in prior years.
4. Revenues
The Company receives reimbursement under the federal Medicare program and various state Medicaid
programs. Revenues under these programs totaled $2.5 billion, $2.4 billion and $2.2 billion for
the years ended December 31, 2006, 2005 and 2004, respectively.
Revenues for certain health care services are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Skilled nursing and assisted
living services |
|
$ |
3,009,045 |
|
|
$ |
2,893,900 |
|
|
$ |
2,708,201 |
|
Hospice and home health services |
|
|
479,262 |
|
|
|
394,804 |
|
|
|
383,869 |
|
Rehabilitation services
(excluding intercompany revenues) |
|
|
94,391 |
|
|
|
97,495 |
|
|
|
85,306 |
|
Other services |
|
|
30,487 |
|
|
|
31,091 |
|
|
|
31,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,613,185 |
|
|
$ |
3,417,290 |
|
|
$ |
3,208,867 |
|
|
|
|
|
|
|
|
|
|
|
5. Property and Equipment
Property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(In thousands) |
|
Land and improvements |
|
$ |
230,503 |
|
|
$ |
235,539 |
|
Buildings and improvements |
|
|
1,684,265 |
|
|
|
1,652,308 |
|
Equipment and furnishings |
|
|
312,623 |
|
|
|
328,772 |
|
Capitalized leases |
|
|
24,041 |
|
|
|
23,928 |
|
Construction in progress |
|
|
86,615 |
|
|
|
56,635 |
|
|
|
|
|
|
|
|
|
|
|
2,338,047 |
|
|
|
2,297,182 |
|
Less accumulated depreciation |
|
|
844,471 |
|
|
|
812,707 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
1,493,576 |
|
|
$ |
1,484,475 |
|
|
|
|
|
|
|
|
55
Depreciation expense, including amortization of capitalized leases, amounted to $139.0 million,
$132.1 million and $121.5 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Accumulated depreciation included $12.4 million and $11.4 million at December 31,
2006 and 2005, respectively, relating to capitalized leases.
Capitalized systems development costs of $32.5 million and $33.4 million at December 31, 2006 and
2005, respectively, net of accumulated amortization of $22.7 million and $21.4 million,
respectively, are included in other assets. Amortization expense related to capitalized systems
development costs amounted to $5.6 million, $6.5 million and $5.9 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
6. Debt
Debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(In thousands) |
|
Revolving credit facility |
|
$ |
36,000 |
|
|
$ |
22,800 |
|
Senior Notes, 6.25%, due May 1, 2013 (1) |
|
|
199,605 |
|
|
|
199,542 |
|
Convertible Senior Notes: |
|
|
|
|
|
|
|
|
2.125%, due April 15, 2023: (2) |
|
|
|
|
|
|
|
|
Old Notes |
|
|
6,552 |
|
|
|
6,552 |
|
New Notes |
|
|
93,431 |
|
|
|
93,433 |
|
2.125%, due August 1, 2035 (3) |
|
|
400,000 |
|
|
|
400,000 |
|
2.0%, due June 1, 2036 |
|
|
250,000 |
|
|
|
|
|
Other debt |
|
|
2,640 |
|
|
|
3,914 |
|
Capital lease obligations |
|
|
5,430 |
|
|
|
6,860 |
|
|
|
|
|
|
|
|
|
|
|
993,658 |
|
|
|
733,101 |
|
Less amounts due within one year |
|
|
38,447 |
|
|
|
25,435 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
955,211 |
|
|
$ |
707,666 |
|
|
|
|
|
|
|
|
|
| (1) Net of discount |
| |
| (2) Interest rate increased to 2.625% from August 20, 2003 through December 31, 2008 |
| |
| (3)
Interest will decrease to 1.875% after August 1, 2010 |
Revolving Credit Facility. In May 2005, the Company terminated its existing three-year,
$200 million revolving credit facility that was scheduled to mature April 21, 2006.
Simultaneously, the Company entered into a new five-year, $300 million unsecured revolving credit
facility with a group of lenders, with an uncommitted option available to increase the facility by
up to an additional $100 million (accordion feature), which was amended in June 2006. The amended
credit facility changed the existing credit facility, primarily, by (1)
56
increasing the unsecured
credit by $100 million to $400 million, with the uncommitted option to increase the facility by up
to an additional $100 million (accordion feature), (2) changing the expiration date from May 27,
2010 to June 22, 2011, and (3) decreasing the interest rate margin and facility fee. Loans under
the revolving credit facility are guaranteed by substantially all of the Company’s subsidiaries.
This credit facility contains various covenants, restrictions and events of default. Among other
things, these provisions require the Company to maintain certain financial ratios and impose
certain limits on its ability to incur indebtedness, create liens, pay dividends, repurchase stock
and dispose of assets.
The Company can borrow under the credit facility, at its option, on either a competitive
advance basis or a revolving credit basis. Competitive borrowings will bear interest at market
rates prevailing at the time of the borrowing on either a fixed-rate or a floating-rate basis, at
the Company’s option. Revolving borrowings will bear interest at variable rates that reflect, at
the Company’s option, the agent bank’s base lending rate or an increment over Eurodollar indices,
depending on the quarterly performance of a key ratio (debt divided by earnings before interest,
taxes, depreciation and amortization (EBITDA), as defined in the credit agreement). The credit
facility also provides for a fee on the total amount of the facility, depending on the same key
ratio. In addition to direct borrowings, the credit facility may be used to support the issuance
of up to $125 million of letters of credit. At December 31, 2006 and 2005, the average interest
rate on the loans under the revolving credit facility was 6.1 percent and 6.3 percent,
respectively, excluding the fee on the total facility. As of December 31, 2006, $36.0 million was
outstanding under this facility, and after consideration of usage for letters of credit, $318.0
million, plus the accordion feature, was available for future borrowing.
Senior Notes. During 2005, the Company redeemed the remaining $100 million of the 7.5% Senior
Notes issued by its wholly owned subsidiary and $150 million of its 8% Senior Notes. In
conjunction with the redemption of these notes, the Company recorded expenses of $18.6 million as
early extinguishment of debt. These expenses included make-whole payments of $12.3 million for
early redemption of the notes and unwind fees of $5.6 million related to the termination of the
interest rate swap agreements.
During 2004, the Company purchased $50 million of the 7.5% Senior Notes and $50 million of its 8%
Senior Notes, pursuant to cash tender offers. The Company recorded costs of $11.2 million related
to these tender offers, including $10.5 million for the prepayment premium, $0.4 million for fees
and expenses, and $0.3 million for the write-off of deferred financing
costs.
Convertible Senior Notes due 2023. In 2004, the Company completed an exchange offer for its
2.125% Convertible Senior Notes due 2023 (the 2023 Notes) because of a change in accounting rules
that required contingently convertible securities to be included in diluted earnings per share (if
dilutive), regardless of whether the market price trigger had been met. The Company exchanged
$93.4 million principal amount of Old Notes for New Notes with a net share settlement provision,
which allowed the Company to substitute cash for the principal value portion of the conversion
value due holders of the New Notes, thereby reducing the number of
57
shares of common stock issued
upon conversion. The New Note holders also received an exchange fee of 0.25 percent of the
principal amount of the Old Notes exchanged. In addition, the Company is now required to pay in
cash the purchase price to New Note holders upon redemption on certain dates or in connection with
certain events.
The initial conversion price is $31.12 per share of common stock, equivalent to 32.1337 shares of
the Company’s common stock per $1,000 principal amount of notes. The conversion price is subject
to adjustment in certain events. The holders of the Old Notes may convert their notes into shares
of the Company’s common stock or the holders of the New Notes may convert their notes into cash for
the principal value and into shares of the Company’s common stock for the excess value, if any,
prior to the stated maturity at their option only under the following circumstances: (1) if the
average of the last reported sales prices of the Company’s common stock for the 20 trading days
immediately prior to the conversion date is greater than or equal to 120 percent of the conversion
price per share of common stock on such conversion date, (2) if the Company has called the 2023
Notes for redemption, (3) upon the occurrence of specified corporate transactions, or (4) if the
credit ratings assigned to the 2023 Notes decline to certain levels.
At its option, the Company may redeem the 2023 Notes on or after April 15, 2010 for cash at 100
percent of the principal amount. Starting with the six-month period beginning April 15, 2010, the
Company may under certain circumstances be obligated to pay contingent interest to the holders of
the 2023 Notes. The Company’s obligation to pay contingent interest is considered to be an
embedded derivative, and the value is not material. The holders of the 2023 Notes may require the
Company to purchase all or a portion of their notes at any of five specified dates during the life
of the notes. On the first date, April 15, 2005, the Company was obligated to redeem $15,000 and
was required to pay in cash. The next date is April 15, 2008. On the specified dates other than
the first, the Company is required to pay the New Notes in cash, but may elect to satisfy the
repurchase of the Old Notes in whole or in part with common stock rather than cash.
Convertible Senior Notes due 2035. In August 2005, the Company issued $400 million principal
amount of 2.125% Convertible Senior Notes due in 2035 (the 2035 Notes) in a private placement and
subsequently registered the 2035 Notes with the Securities and Exchange Commission in December
2005.
The 2035 Notes are convertible into cash and, if applicable, shares of the Company’s common stock
based on an initial conversion rate, subject to adjustment, of 22.3474 shares per $1,000 principal
amount of 2035 Notes (which represents an initial conversion price of approximately $44.75 per
share), only under the following circumstances: (1) if the average of the last reported sales
prices of the Company’s common stock for the 20 trading days immediately prior to the conversion
date is greater than or equal to 120 percent of the conversion price per share of common stock on
such conversion date, (2) if the Company has called the 2035 Notes for redemption, (3) upon the
occurrence of specified corporate transactions, or (4) if the credit
58
ratings assigned to the 2035
Notes decline to certain levels. In general, upon conversion of a note, a holder will receive (a)
cash equal to the lesser of the principal amount of the note or the conversion value of the note
and (b) common stock of the Company for any conversion value in excess of the principal amount.
At its option, the Company may redeem the 2035 Notes on or after August 1, 2010 for cash at 100
percent of the principal amount. The holders of the 2035 Notes may require the Company to purchase
all or a portion of their notes under certain circumstances, in each case at a repurchase price in
cash equal to 100 percent of the principal amount of the repurchased 2035 Notes at any of five
specified dates during the life of the 2035 Notes, with the first such date being August 1, 2010,
or if certain fundamental changes occur.
In connection with the issuance of the 2035 Notes, the Company entered into convertible note hedge
and warrant option transactions with respect to its common stock. The note hedge and warrant
transactions, both of which expire August 1, 2010, must be net share settled. The maximum number
of shares to be issued under the warrant is 8.9 million shares, subject to certain adjustment
provisions. These transactions have no effect on the terms of the 2035 Notes and are intended to
reduce the potential dilution upon future conversion of the 2035 Notes by effectively increasing
the initial conversion price to $59.66 per share, representing a 60 percent conversion premium.
The net cost of $53.8 million of the convertible note hedge and warrant option transactions was
included in shareholders’ equity, along with the partially offsetting tax benefit of the hedge of
$29.3 million.
The net proceeds of $390.8 million from issuing the 2035 Notes were used to purchase $237.0 million
of the Company’s common stock (a portion of which purchase was completed under an accelerated share
repurchase agreement, as discussed in Note 12), to pay the net cost of $53.8 million of the
convertible note hedge and warrant option transactions, and to redeem the remaining $100 million
principal amount of the 7.5% Senior Notes.
Convertible Senior Notes due 2036. In May 2006, the Company issued $250 million principal
amount of 2.0% Convertible Senior Notes due in 2036 (the 2036 Notes) in a private placement and
subsequently registered the 2036 Notes with the Securities and Exchange Commission in August 2006.
Starting with the six-month period beginning June 1, 2013, the Company may under certain
circumstances be obligated to pay contingent interest to the
holders of the 2036 Notes. The Company’s obligation to pay contingent interest is considered
to be an embedded derivative, and the value is not material.
The 2036 Notes are convertible into cash and, if applicable, shares of the Company’s common stock
based on an initial conversion rate, subject to adjustment, of 20.0992 shares per $1,000 principal
amount of 2036 Notes (which represents an initial conversion price of approximately $49.75 per
share), only under the following circumstances: (1) if the average of the last reported sales
prices of the Company’s common stock for the 20 trading days immediately prior to the conversion
date is greater than or equal to 130 percent of the conversion price per share of
59
common stock on
such conversion date, (2) if the Company has called the 2036 Notes for redemption, (3) upon the
occurrence of specified corporate transactions, or (4) if the credit ratings assigned to the 2036
Notes decline to certain levels. In general, upon conversion of a note, a holder will receive (a)
cash equal to the lesser of the principal amount of the note or the conversion value of the note
and (b) common stock of the Company for any conversion value in excess of the principal amount.
At its option, the Company may redeem the 2036 Notes on or after June 1, 2013 for cash at 100
percent of the principal amount. The holders of the 2036 Notes may require the Company to purchase
all or a portion of their notes on June 1, 2013 or if certain fundamental changes occur, in each
case at a repurchase price in cash equal to 100 percent of the principal amount of the repurchased
2036 Notes.
The net proceeds from the issuance of the 2036 Notes were $244.3 million, after deducting fees and
expenses. The Company used the net proceeds to purchase its common stock (a portion of which
purchase was completed under an accelerated share repurchase agreement, as discussed in Note 12).
Substantially all of the Company’s subsidiaries guarantee the 6.25% Senior Notes, the 2023 Notes,
the 2035 Notes and the 2036 Notes, and these subsidiaries are 100 percent owned. The guarantees
are full and unconditional and joint and several, and the Company’s non-guarantor subsidiaries are
minor. The parent company has no independent assets or operations.
Other Debt. The interest rates on other long-term debt are all variable with an average rate
of 6.1 percent. Maturities range from 2008 to 2009. Owned property with a net book value of $13.4
million is pledged or mortgaged.
Interest paid, primarily related to debt, amounted to $29.5 million, $39.7 million and $40.8
million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company also paid
$17.9 million and $10.5 million for the years ended December 31, 2005 and 2004, respectively,
related to debt prepayment premiums and interest rate swap unwind fees. Capitalized interest costs
amounted to $1.8 million, $1.0 million and $1.0 million for the years ended December 31, 2006, 2005
and 2004, respectively.
Debt maturities for the five years subsequent to December 31, 2006 are as follows: 2007 –
$38.5 million; 2008 – $1.6 million; 2009 – $0.3 million; 2010 –
$400.1 million; and 2011 – $100.1 million. Debt maturities in 2010 include the Company’s
2035 Notes because the Company may be required to redeem the 2035 Notes from its holders on August
1, 2010. Debt maturities in 2011 include the Company’s 2023 Notes. The holders of the 2023 Notes
could convert their notes at December 31, 2006, because the Company’s stock price exceeded the
required average price. The Company classified the 2023 Notes as long-term because it has the
ability and intent to finance the redemption with its revolving credit facility that matures June
22, 2011.
60
7. Fair Value of Financial Instruments
The carrying amount and fair value of the financial instruments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| |
|
Amount |
|
Value |
|
Amount |
|
Value |
| |
|
(In thousands) |
Cash and cash equivalents |
|
$ |
17,658 |
|
|
$ |
17,658 |
|
|
$ |
12,293 |
|
|
$ |
12,293 |
|
Debt, excluding capitalized leases |
|
|
988,228 |
|
|
|
1,107,629 |
|
|
|
726,241 |
|
|
|
779,112 |
|
The carrying amount of cash and cash equivalents is equal to its fair value due to the short
maturity of the investments.
The fair value of the Senior Notes and Convertible Senior Notes is based on quoted market values.
The Company’s variable-rate debt is considered to be at fair value.
8. Leases
The Company leases certain property and equipment under both operating and capital leases, which
expire at various dates to 2036. Certain of the facility leases contain purchase options. The
Company’s corporate headquarters is leased by one of its subsidiaries, and the Company has
guaranteed its subsidiary’s obligations thereunder. The lease obligation includes the annual
operating lease payments that reflect interest only payments on the lessor’s $22.8 million of
underlying debt obligations, as well as a residual guarantee of that amount at the maturity in
2009. At the maturity of the lease, the Company’s subsidiary will be obligated either to purchase
the building by paying the $22.8 million of underlying debt or to vacate the building and cover the
difference, if any, between that amount and the then fair market value of the building. The
residual guarantee of $22.8 million is an off-balance sheet arrangement, and is not included in the
table below. The Company believes that there is no deficiency related to its guarantee at December
31, 2006.
61
Payments under non-cancelable operating leases, minimum lease payments and the present value of net
minimum lease payments under capital leases as of December 31, 2006 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Operating |
|
|
Capital |
|
| |
|
Leases |
|
|
Leases |
|
| |
|
(In thousands) |
|
2007 |
|
$ |
16,321 |
|
|
$ |
1,718 |
|
2008 |
|
|
14,292 |
|
|
|
618 |
|
2009 |
|
|
10,715 |
|
|
|
518 |
|
2010 |
|
|
7,340 |
|
|
|
437 |
|
2011 |
|
|
3,885 |
|
|
|
426 |
|
Later years |
|
|
9,257 |
|
|
|
8,471 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
61,810 |
|
|
|
12,188 |
|
|
|
|
|
|
|
|
|
| |
Less amount representing interest |
|
|
|
|
|
|
6,758 |
|
|
|
|
|
|
|
|
|
Present value of net minimum
lease payments (included in
long-term debt – see Note 6) |
|
|
|
|
|
$ |
5,430 |
|
|
|
|
|
|
|
|
|
Rental expense was $21.1million, $19.9 million and $21.4 million for the years ended December 31,
2006, 2005 and 2004, respectively. The 2005 rental expense excluded a correction of $3.0 million
in the Company’s lease accounting practices recorded in the second quarter of 2005. At December
31, 2006, the Company had a current liability of $0.1 million and a long-term liability of $3.0
million that represented the straight-line lease expense in excess of payments for its operating
lease obligations.
62
9. Income Taxes
The provision for income taxes before cumulative effect consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
96,887 |
|
|
$ |
32,101 |
|
|
$ |
68,492 |
|
State and local |
|
|
10,035 |
|
|
|
5,847 |
|
|
|
11,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,922 |
|
|
|
37,948 |
|
|
|
80,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(8,449 |
) |
|
|
61,070 |
|
|
|
7,384 |
|
State and local |
|
|
(1,475 |
) |
|
|
(2,301 |
) |
|
|
(1,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,924 |
) |
|
|
58,769 |
|
|
|
6,357 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes before
cumulative effect |
|
$ |
96,998 |
|
|
$ |
96,717 |
|
|
$ |
86,657 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of (a) the amount computed by applying the statutory federal income tax rate to
income before income taxes to (b) the provision for income taxes before cumulative effect is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Income taxes computed at statutory rate |
|
$ |
93,295 |
|
|
$ |
90,185 |
|
|
$ |
89,208 |
|
Differences resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes |
|
|
5,564 |
|
|
|
2,305 |
|
|
|
7,008 |
|
Adjustment to prior years’ estimated
tax liabilities |
|
|
(3,393 |
) |
|
|
|
|
|
|
(8,912 |
) |
Other |
|
|
1,532 |
|
|
|
4,227 |
|
|
|
(647 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes before
cumulative effect |
|
$ |
96,998 |
|
|
$ |
96,717 |
|
|
$ |
86,657 |
|
|
|
|
|
|
|
|
|
|
|
The Internal Revenue Service has examined the Company’s federal income tax returns through 2004,
and appropriate adjustments have been made to prior years’ estimated tax liabilities. The Company
believes that it has made adequate provision for income taxes that may become payable with respect
to open tax years.
63
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amount used for income
tax purposes. Significant components of the Company’s federal and state deferred tax assets and
liabilities are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued insurance liabilities |
|
$ |
80,872 |
|
|
$ |
87,298 |
|
Employee compensation and benefits |
|
|
73,316 |
|
|
|
59,743 |
|
Convertible note hedge |
|
|
21,659 |
|
|
|
27,236 |
|
State net operating loss and credit
carryforward |
|
|
20,417 |
|
|
|
9,712 |
|
Allowances for receivables and settlements |
|
|
13,057 |
|
|
|
10,154 |
|
Other |
|
|
4,667 |
|
|
|
3,464 |
|
|
|
|
|
|
|
|
|
|
|
213,988 |
|
|
|
197,607 |
|
Valuation allowance |
|
|
(18,978 |
) |
|
|
(9,106 |
) |
|
|
|
|
|
|
|
|
|
$ |
195,010 |
|
|
$ |
188,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciable/amortizable assets |
|
$ |
165,114 |
|
|
$ |
173,793 |
|
Prepaid employee leasing services |
|
|
62,634 |
|
|
|
58,847 |
|
Leveraged leases |
|
|
19,912 |
|
|
|
22,309 |
|
Interest on Convertible Senior Notes |
|
|
9,628 |
|
|
|
5,554 |
|
Pension receivable |
|
|
831 |
|
|
|
12,780 |
|
Other |
|
|
14,851 |
|
|
|
21,770 |
|
|
|
|
|
|
|
|
|
|
$ |
272,970 |
|
|
$ |
295,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(77,960 |
) |
|
$ |
(106,552 |
) |
|
|
|
|
|
|
|
The Company has deferred tax assets related to state net operating loss and credit carryforwards
with expiration dates varying from 2007 through 2026. These potential future state tax benefits
have been largely offset by a valuation allowance based on the Company’s analysis of the likelihood
of generating sufficient taxable income in the various state jurisdictions to utilize the benefits
before expiration.
Income taxes paid, net of refunds, amounted to $84.8 million, $27.8 million and $68.0 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
10. Commitments/Contingencies
One or more subsidiaries or affiliates of the Company have been identified as potentially
responsible parties (PRPs) in a variety of actions (the Actions) relating to waste disposal sites
which allegedly are subject to remedial action under the Comprehensive Environmental Response
Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state
laws. CERCLA imposes retroactive, strict joint and several liability on PRPs
64
for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco, Incorporated
and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned
subsidiary of the Company. The Actions allege that Cenco transported and/or generated hazardous
substances that came to be located at the sites in question. Environmental proceedings such as the
Actions may involve owners and/or operators of the hazardous waste site, multiple waste generators
and multiple waste transportation disposal companies. Such proceedings involve efforts by
governmental entities and/or private parties to allocate or recover site investigation and clean-up
costs, which costs may be substantial. The potential liability exposure for currently pending
environmental claims and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the Actions and the fact that
the ultimate cost of the remedial actions for some of the waste disposal sites where subsidiaries
or affiliates of the Company are alleged to be a potentially responsible party has not yet been
quantified. At December 31, 2006 and 2005, the Company had $4.8 million accrued in other long-term
liabilities based on its current assessment of the likely outcome of the Actions. The amount of the
Company’s reserve is based on management’s continual monitoring of the litigation activity,
estimated clean-up costs and the portion of the liability for which the Company is responsible.
At December 31, 2006 and 2005, there were no receivables related to insurance recoveries.
The Company is party to various other legal matters arising in the ordinary course of business,
including patient care-related claims and litigation. At December 31, 2006 and 2005, the general
and professional liability consisted of short-term reserves of $61.7 million and $61.8 million,
respectively, which were included in accrued insurance liabilities, and long-term reserves of
$109.0 million and $118.5 million, respectively, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums and
administrative fees was $64.5 million, $72.5 million and $78.7 million for the years ended December
31, 2006, 2005 and 2004, respectively, which was included in operating expenses. Although
management believes that the Company’s liability reserves are adequate, there can be no assurance
that such provision and liability will not require material adjustment in future periods.
As of December 31, 2006, the Company had contractual commitments of $4.9 million relating to its
internal construction program. As of December 31, 2006, the Company had total letters of
credit of $46.0 million that benefit certain third-party insurers, and 99 percent of these letters
of credit related to recorded liabilities.
65
11. Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands, except earnings per share) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic EPS – income before
cumulative effect |
|
$ |
169,560 |
|
|
$ |
160,955 |
|
|
$ |
168,222 |
|
After-tax amount of interest expense on
Convertible Senior Notes (Old Notes) |
|
|
109 |
|
|
|
108 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted EPS |
|
$ |
169,669 |
|
|
$ |
161,063 |
|
|
$ |
168,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS – weighted-average shares |
|
|
75,618 |
|
|
|
83,269 |
|
|
|
86,762 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
915 |
|
|
|
1,050 |
|
|
|
1,114 |
|
Restricted stock or units |
|
|
109 |
|
|
|
26 |
|
|
|
469 |
|
Convertible Senior Notes |
|
|
1,643 |
|
|
|
685 |
|
|
|
380 |
|
Forward contract |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS –
adjusted for weighted-average
shares and assumed conversions |
|
|
78,285 |
|
|
|
85,044 |
|
|
|
88,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS — Income before cumulative effect: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.24 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
Diluted |
|
$ |
2.17 |
|
|
$ |
1.89 |
|
|
$ |
1.90 |
|
Options to purchase shares of the Company’s common stock that were not included in the
computation of diluted EPS because the options’ exercise prices were greater than the average
market price of the common shares were 0.5 million shares with an average exercise price of $39 in
2005 and 1.1 million shares with an average exercise price of $36 in 2004.
The Company’s warrants related to its $400 million Convertible Senior Notes due in 2035 were not
included in the computation of diluted EPS, because the warrants’ current conversion price of
$59.60 was greater than the average market price of the common shares. The Company’s $250
Convertible Senior Notes due in 2036, which were issued in May 2006, were only included as dilutive
securities in the third quarter of 2006. The 2036 Notes conversion price of $49.75 was greater
than the average market price of the Company’s common shares in the other quarters.
66
12. Stock Purchase
At December 31, 2004, the Company had remaining authority to purchase $57.3 million of its common
stock. In 2005, the Company announced that its Board of Directors authorized management to spend
an additional $300 million to purchase common stock through December 31, 2006. The Company
purchased 8.4 million shares during 2005 for $316.4 million, including 4.6 million shares as part
of an accelerated share repurchase (ASR) agreement described below. In 2006, the Company announced
that its Board of Directors authorized an additional $400 million to purchase common stock, with
$100 million of the authorization expiring on December 31, 2006 and the remaining $300 million on
December 31, 2007. The Company purchased 7.0 million shares during 2006 for $328.8 million,
including 2.0 million shares as part of an ASR agreement described below. At December 31, 2006,
the Company had remaining unused repurchase authority of $112.1 million.
The Company entered into two ASR agreements. In August 2005, the Company purchased 4.6 million
shares of its common stock under an ASR agreement with an investment bank for an aggregate cost of
$174.8 million. In May 2006, the Company purchased 2.0 million shares of its common stock under an
ASR agreement with an investment bank for an aggregate cost of $99.9 million. The agreements
allowed the Company to repurchase the shares immediately, while the investment bank purchased the
shares in the market over time. The ASR agreements were subject to a market price adjustment based
on the difference between the volume-weighted average price during the contract period, which was
subject to an upper and lower limit. For the 2005 agreement, the Company was required to pay a
price adjustment in either cash or shares of its common stock, at the Company’s option. The
Company paid the final settlement of $1.2 million in cash. The ASR agreement was classified as
equity, and the market price adjustment was recorded in shareholders’ equity as an additional cost
to purchase treasury stock. For the 2006 agreement, the Company received a settlement of 76,708
shares of its common stock as a result of the price adjustment. The ASR agreement and related
price adjustment were recorded as treasury stock in shareholders’ equity.
13. Stock-Based Compensation
The Company has a stock plan (Equity Plan) that was approved by shareholders, as explained more
fully below. Under the Equity Plan, the Company has issued non-qualified stock options, restricted
stock (time- and performance-vested), and restricted stock units. The
Company has another plan under which it has awarded cash-settled stock appreciation rights (SARs).
Prior to January 1, 2006, the Company accounted for these plans under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related Interpretations, as permitted by FASB Statement No. 123
“Accounting for Stock-Based Compensation” (Statement 123). The Company recognized stock-based
compensation expense for all awards in its results of operations, except for stock options.
Effective January 1, 2006, the Company adopted the fair-value recognition provisions of FASB
Statement No. 123R, “Share-Based Payment” (Statement 123R), using the
modified-prospective-
67
transition method. Under this transition method, compensation cost recognized
in 2006 includes:
| |
¨ |
|
Compensation cost for restricted stock or restricted stock units granted prior to
January 1, 2006, but not yet vested, and any new awards after January 1, 2006. The
grant-date fair value is based on the market closing stock price on the day prior to grant. |
| |
| |
¨ |
|
Compensation cost for stock options granted prior to January 1, 2006, but not yet
vested, and any new awards after that date. The grant-date fair value is determined under
the Black-Scholes option valuation model. |
| |
| |
¨ |
|
Compensation cost for SARs outstanding at January 1, 2006 based on the fair-value
calculation every quarter using the Black-Scholes option valuation model. |
| |
| |
¨ |
|
The difference between the SAR liability measured under the intrinsic-value method in
accordance with Statement 123 versus the fair-value method under Statement 123R was
recorded as a one-time cumulative effect as of January 1, 2006. The Company’s SAR
liability increased $4.0 million ($2.5 million after tax, or $.03 per share) as a result of
the fair-value calculation using the Black-Scholes option valuation model. When an SAR is
cash-settled, the Company adjusts its expense to the intrinsic value. |
Based on the method of adoption, the Company has not restated its stock-based compensation expense
recorded in prior years. For the years ended December 31, 2006, 2005 and 2004, the Company’s
income statement included compensation cost related to these plans of $28.6 million, $19.4 million
and $8.1 million, respectively, and an income tax benefit of $8.5 million, $4.7 million and $2.4
million, respectively, excluding the cumulative effect as previously discussed. Of the total
stock-based compensation cost, $23.6 million, $14.7 million and $4.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively, were recorded in general and administrative
expenses with the remainder in operating expenses.
As a result of adopting Statement 123R, the Company’s pretax income for 2006 was lower by $4.7
million ($3.0 million after tax, or $.04 per share), due to expensing its stock options. Prior to
adoption of Statement 123R, the Company presented all tax benefits of deductions resulting from the
exercise of its stock options or vesting of restricted stock as operating cash flows in the
Statement of Cash Flows. Statement 123R requires the cash flows resulting from the tax benefits of
tax deductions in excess of the compensation cost recognized for those options or restricted stock
(excess tax deductions) to be classified as financing cash flows. The
$17.3 million of excess tax benefits classified as a financing cash flow for 2006 would have been
classified as an operating cash flow if the Company had not adopted Statement 123R. Stock-based
compensation liabilities of $4.1 million at December 31, 2005 were reclassified to shareholders’
equity as required by Statement 123R.
The following table illustrates the effect on net income and earnings per share in 2005 and 2004 as
if the Company had applied the fair-value recognition provisions of Statement 123 to stock-based
employee compensation for its options. Effective March 15, 2005, stock options were awarded to
executive officers that vest immediately, which resulted in pro forma expense, net of tax, of $4.2
million. In addition, the vesting of the stock options awarded in February 2003 and 2004 with an
original three-year vesting were accelerated to vest immediately. The accelerated
68
vesting of
prior-year awards resulted in additional pro forma expense, net of related tax effects, of $3.0
million, as included in the table below. The Company accelerated the vesting of the prior-year
awards in order to avoid compensation expense when Statement 123R was adopted.
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(In thousands, except earnings per share) |
|
Net income — as reported |
|
$ |
160,955 |
|
|
$ |
168,222 |
|
Deduct: Total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of related tax effects |
|
|
(10,444 |
) |
|
|
(4,522 |
) |
|
|
|
|
|
|
|
Net income — pro forma |
|
$ |
150,511 |
|
|
$ |
163,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — as reported: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.93 |
|
|
$ |
1.94 |
|
Diluted |
|
$ |
1.89 |
|
|
$ |
1.90 |
|
Earnings per share — pro forma: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.81 |
|
|
$ |
1.89 |
|
Diluted |
|
$ |
1.76 |
|
|
$ |
1.84 |
|
Plan Information
The Company’s Amendment and Restatement of the Equity Incentive Plan (Equity Plan) that was
approved by shareholders in May 2004 allows the Company to grant awards of non-qualified stock
options, incentive stock options, restricted stock, restricted stock units and stock appreciation
rights to key employees, consultants and directors. The Company has not awarded incentive stock
options or stock appreciation rights under the Equity Plan. A maximum of 10,000,000 shares of
common stock are authorized for issuance under the Equity Plan, with no more than 3,750,000 shares
to be granted as restricted stock or restricted stock units. Shares covered by expired or canceled
options, by surrender or repurchase of restricted stock, or by shares withheld for the exercise
price or tax withholding thereon, may also be
awarded under the Equity Plan. The Equity Plan replaced the Company’s previous key employee stock
option plan, outside director stock option plan, and key senior management employee restricted
stock plan. Under the Equity Plan, there were 4.8 million shares available for future awards at
December 31, 2006, excluding performance-vested awards for future years. Generally, the Company
uses treasury shares when issuing shares for equity awards.
As of December 31, 2006, there was $19.2 million of total unrecognized compensation cost related to
nonvested awards. The awards include stock options, restricted stock, and restricted stock units,
but exclude performance-vested restricted stock and SARs. The cost is expected to be recognized
over a weighted-average period of 5.2 years. Shares delivered to the Company by employees to cover
the payment of the option price and tax withholdings of the option exercise or restricted stock had
a value of $58.5 million, $33.2 million and $9.7 million for the years ended December 31, 2006,
2005 and 2004, respectively. The cash received for the exercise of
69
stock options was $14.7
million, $22.3 million and $19.8 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
Stock Options. The exercise price of each option equals the market closing price of the
Company’s stock on the day prior to date of grant. An option’s maximum term is 10 years for
pre-2006 awards and seven years for 2006 awards. For all nonvested options, the options cliff vest
in three years, with the exception that an employee eligible for normal retirement has a one-year
cliff-vesting period. Dividends are not paid on unexercised options.
The following table summarizes activity in the Company’s stock option plans for 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
| |
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
| |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
| |
|
Shares |
|
|
Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at Dec. 31, 2005 |
|
|
5,126,194 |
|
|
$ |
27.89 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
690,398 |
|
|
|
41.45 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,750 |
) |
|
|
27.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,206,754 |
) |
|
|
24.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Dec. 31, 2006 |
|
|
3,604,088 |
|
|
|
32.30 |
|
|
|
5.0 |
|
|
$ |
53,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at Dec. 31, 2006 |
|
|
3,254,088 |
|
|
|
31.55 |
|
|
|
4.8 |
|
|
$ |
50,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options are the options that are expected to vest. The total intrinsic value of
options exercised was $48.1 million, $26.8 million and $17.6 million for the years ended December
31, 2006, 2005 and 2004, respectively.
During 2006, 290,398 options were granted under the Equity Plan’s reload feature, and the fair
value was expensed immediately because the options were exercisable on the date of grant.
The reload feature allows an employee to exercise an option by delivering shares of the
Company’s common stock to cover the option’s exercise price and withholding taxes. The employee is
automatically granted an additional option for the shares of common
stock delivered to the Company. Beginning in 2005, the Company
discontinued making new option awards with the reload feature.
The weighted-average grant-date fair value of options was calculated using the Black-Scholes
option valuation model based on the assumptions in the table below. The expected volatility was
based on historical volatility of the Company’s daily stock price close over a specified period.
The expected term was based on the historical exercise patterns, if available, for each option
award.
70
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
|
2004 |
Expected volatility range |
|
|
21-33 |
% |
|
|
22-40 |
% |
|
|
18-40 |
% |
Weighted-average volatility |
|
|
27 |
% |
|
|
37 |
% |
|
|
37 |
% |
Expected term (in years) |
|
|
3.2 |
|
|
|
4.6 |
|
|
|
4.2 |
|
Dividend yield |
|
|
1.5 |
% |
|
|
1.7 |
% |
|
|
1.6 |
% |
Risk-free interest rate range |
|
|
4.5-5.1 |
% |
|
|
3.5-4.2 |
% |
|
|
1.4-3.2 |
% |
Weighted-average grant-date fair value |
|
$ |
9.65 |
|
|
$ |
11.42 |
|
|
$ |
10.07 |
|
Restricted Stock. The holders of restricted stock are paid cash dividends that are not
forfeitable. The following table summarizes restricted stock activity for 2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| |
|
Shares |
|
Fair Value |
Restricted stock at Dec. 31, 2005 |
|
|
999,489 |
|
|
$ |
20.40 |
|
Issue of performance-vested |
|
|
95,737 |
|
|
|
39.77 |
|
Issue of time-vested |
|
|
15,400 |
|
|
|
45.06 |
|
Restrictions lapse due to retirement |
|
|
(558,408 |
) |
|
|
16.27 |
|
Delivered for tax withholdings |
|
|
(38,687 |
) |
|
|
37.79 |
|
|
|
|
|
|
|
|
|
|
Restricted stock at Dec. 31, 2006 |
|
|
513,531 |
|
|
|
27.93 |
|
|
|
|
|
|
|
|
|
|
In 2006, the non-management members of the Company’s Board of Directors were issued an aggregate
15,400 restricted shares with a grant-date fair value of $45.06 per share. Because the awards do
not require a service period and are considered to vest immediately, the fair value was expensed
immediately. The shares are non-forfeitable, and the restrictions on the shares lapse when the
director ceases to serve on the Board. The 2005 performance-vested restricted stock awards were
issued to certain executive officers upon certification by the Compensation Committee in January
2006, as discussed below, but remain restricted until termination from the Company. Of the 513,531
restricted shares outstanding at December 31, 2006, all of the shares are vested and
non-forfeitable except for 25,000 shares that have a specified service requirement. The
weighted-average grant-date fair value of time-vested restricted stock granted during the years
ended December 31, 2006, 2005 and 2004 was $45.06, $35.43 and $34.30 per share, respectively. The
total fair value of all shares that vested during the years ended December 31, 2006, 2005 and 2004
was $5.2 million, $11.1 million and $9.0 million, respectively.
The compensation expense related to time-vested restricted stock issued prior to 2006 is amortized
based on the specified vesting period or up to the employee’s expected retirement date, as stated
in the award agreement. An employee’s retirement before the expected retirement date requires an
acceleration of any remaining unrecognized compensation expense. During 2005 and 2006, the
Company accelerated the amortization of compensation expense related to certain awards based on the
announcement of certain employees’ actual retirement dates. Because the Company
71
adopted Statement
123R, any new or modified retirement date vested awards after December 31, 2005 are required to be
amortized up to the employee’s retirement eligible date. The Company recorded compensation expense
for time-vested restricted stock of $5.6 million, $7.1 million and $1.9 million for the years ended
December 31, 2006, 2005 and 2004, respectively. If the Company had recorded the expense based on
the specified vesting period or up to the employees’ retirement eligible dates, the Company would
have expensed $0.9 million, $9.8 million and $3.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Performance-Vested Restricted Stock. In 2005, contingent upon the achievement of certain
performance-based criteria for each year, certain executive officers were awarded restricted stock
for 2005, 2006 and 2007, which vest at the end of the respective year but remain restricted until
termination from the Company. For 2005, 95,737 restricted shares with a fair value of $39.77 per
share, were issued in January 2006, after the Compensation Committee of the Board of Directors
certified the performance against the criteria previously set by the Committee. In 2006, similar
awards were granted for 2006, 2007 and 2008. For 2006, 196,486 shares with a weighted-average fair
value of $37.13 per share were issued in January 2007, after the Compensation Committee of the
Board of Directors certified the performance against the criteria previously set by the Committee.
All of the shares were restricted except for 54,209 shares issued to an officer who retired in
December 2006. For performance-vested restricted stock, there are target awards of 67,833 shares
for 2007 and 34,333 shares for 2008 with a weighted-average grant-date fair value of $37.33 per
share and $39.38 per share, respectively. Depending on the Company’s actual performance, the
awards could range from zero shares to 225 percent of the target shares. The Company accrues the
expense based on the number of awards that are probable of vesting over the year the award is
earned.
Restricted Stock Units. Generally, the restricted stock units vest one third on each of the
third, fourth and fifth anniversary of the grant date. During 2006, the Compensation Committee
approved the accelerated vesting of restricted stock units for an officer who retired in December.
The units earn dividend equivalents that will be forfeited if the original award does not vest.
The Company issued its first restricted stock units in the fourth quarter of 2005. The
weighted-average grant-date fair value of RSUs granted was $40.31 and $37.05 per share for the
years ended December 31, 2006 and 2005, respectively.
The following table summarizes restricted stock units, excluding dividend equivalents, for 2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| |
|
Units |
|
Fair Value |
Restricted units at Dec. 31, 2005 |
|
|
97,300 |
|
|
$ |
37.05 |
|
Granted |
|
|
192,800 |
|
|
|
40.31 |
|
Vested |
|
|
(15,000 |
) |
|
|
47.99 |
|
Forfeited |
|
|
(9,050 |
) |
|
|
37.72 |
|
|
|
|
|
|
|
|
|
|
Restricted units at Dec. 31, 2006 |
|
|
266,050 |
|
|
|
38.78 |
|
|
|
|
|
|
|
|
|
|
72
Cash-Settled Stock Appreciation Rights. In 2006, the Company changed from intrinsic value to
fair value for valuing its SARs. Excluding the cumulative effect, the amount expensed in 2006 was
not materially different from the amount that would have been expensed under the intrinsic-value
method. The SARs cliff vest in three years and have a maximum term of 10 years. Substantially all
of the outstanding SARS are expected to vest. SAR payments were $13.5 million, $8.1 million and
$2.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. Management does
not anticipate granting any additional SARs.
The following table summarizes SAR activity for 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
| |
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
| |
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
| |
|
of SARs |
|
|
Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at Dec. 31, 2005 |
|
|
1,587,050 |
|
|
$ |
25.76 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(93,000 |
) |
|
|
32.37 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(546,405 |
) |
|
|
18.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Dec. 31, 2006 |
|
|
947,645 |
|
|
|
29.31 |
|
|
|
6.7 |
|
|
$ |
16,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at Dec. 31, 2006 |
|
|
297,420 |
|
|
|
17.54 |
|
|
|
5.5 |
|
|
$ |
8,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used to determine the fair value of SARs outstanding at December 31, 2006 were as
follows: weighted-average expected volatility 26 percent (range of 21-39 percent),
weighted-average expected term 2.5 years, and risk-free rate range of 4.6-5.0 percent. When an SAR
is cash-settled, the Company adjusts its expense to the intrinsic value.
14. Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans reflected in the
tables below. The qualified plans include an overfunded plan with frozen future benefits
and an underfunded plan with continuing benefits. The unfunded non-qualified plans include one
plan with frozen future benefits and one with continuing benefits.
Effective December 31, 2006, the Company elected to terminate its qualified, overfunded defined
benefit pension plan. This plan, with frozen benefits prior to 1997, covers certain non-union
employees. In conjunction with this process, the Company made lump-sum distributions in the fourth
quarter of 2006 to terminated vested participants who elected this option. In the first quarter of
2007, the Company will make either lump-sum distributions to participants or transfer account
balances to a licensed insurance company for all remaining vested participants, based on the option
elected by the participants. In accordance with FASB Statement No. 88, “Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” these
actions resulted in a partial settlement in the fourth quarter of 2006
73
and will result in a full
settlement in the first quarter of 2007. The Company expects a total pretax charge of
approximately $32.8 million, with $7.4 million recorded in the fourth quarter and the remainder in
the first quarter of 2007. At this time, the Company expects this charge to be a non-cash charge,
because the pension assets are sufficient to cover the pension obligations.
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132R”
(Statement 158). Statement 158 requires an employer to (1) recognize a plan’s funded status on its
consolidated balance sheet, (2) recognize as a component of other comprehensive income, net of tax,
the gains or losses and prior service costs or credits that arise during the period, but are not
recognized as components of net periodic benefit costs, (3) disclose additional information about
certain effects on net periodic benefit cost for the next fiscal year, and (4) measure a plan’s
assets and obligations as of the end of the employer’s fiscal year. Items 1-3 are effective as of
December 31, 2006 for the Company, and the effect is described below. Item 4 is effective for
fiscal years ending after December 15, 2008, but the Company already measures its plan assets and
obligations as of its year end.
74
Obligations and Funded Status
As of the measurement date (December 31), the funded status of the plans is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(In thousands) |
|
Change in projected benefit obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
78,695 |
|
|
$ |
69,997 |
|
Service cost |
|
|
2,894 |
|
|
|
2,632 |
|
Interest cost |
|
|
3,914 |
|
|
|
4,060 |
|
Actuarial loss |
|
|
4,170 |
|
|
|
7,619 |
|
Benefits paid |
|
|
(18,793 |
) |
|
|
(5,613 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
70,880 |
|
|
|
78,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
46,830 |
|
|
|
48,333 |
|
Actual return on plan assets |
|
|
709 |
|
|
|
2,869 |
|
Employer contribution |
|
|
7,901 |
|
|
|
1,241 |
|
Benefits paid |
|
|
(18,793 |
) |
|
|
(5,613 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
36,647 |
|
|
|
46,830 |
|
|
|
|
|
|
|
|
Funded status |
|
|
(34,233 |
) |
|
|
(31,865 |
) |
Unrecognized transition asset |
|
|
(68 |
) |
|
|
(116 |
) |
Unrecognized prior service cost |
|
|
17,633 |
|
|
|
19,595 |
|
Unrecognized net actuarial loss |
|
|
28,177 |
|
|
|
30,821 |
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
11,509 |
|
|
$ |
18,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheets
consist of: |
|
|
|
|
|
|
|
|
Other long-term assets |
|
$ |
1,199 |
|
|
$ |
33,700 |
|
Intangible asset |
|
|
|
|
|
|
9,449 |
|
Current liabilities |
|
|
(5,045 |
) |
|
|
|
|
Long-term liabilities |
|
|
(30,387 |
) |
|
|
(26,305 |
) |
Accumulated other comprehensive loss |
|
|
45,742 |
|
|
|
1,591 |
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
11,509 |
|
|
$ |
18,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all plans |
|
$ |
60,469 |
|
|
$ |
64,487 |
|
|
|
|
|
|
|
|
|
|
Pension Plans with Accumulated Benefit
Obligations in Excess of Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
37,721 |
|
|
$ |
42,857 |
|
Accumulated benefit obligation |
|
|
27,310 |
|
|
|
28,649 |
|
Fair value of plan assets |
|
|
2,253 |
|
|
|
1,762 |
|
75
Adoption of New Accounting Standard
The incremental effects of adopting the provisions of Statement 158 on the Company’s consolidated
financial statement at December 31, 2006 are presented in the following table. The adoption of
Statement 158 had no effect on the Company’s consolidated statement of income for the year ended
December 31, 2006, or for any prior period presented, and it will not affect operating results in
future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, 2006 |
| |
|
Prior to Adopting |
|
Effect of Adopting |
|
After Adopting |
| |
|
Statement 158 |
|
Statement 158 |
|
Statement 158 |
| |
|
(In thousands) |
Intangible assets |
|
$ |
14,736 |
|
|
$ |
(8,954 |
) |
|
$ |
5,782 |
|
Other long-term assets |
|
|
172,295 |
|
|
|
(25,367 |
) |
|
|
146,928 |
|
Deferred income taxes |
|
|
94,855 |
|
|
|
(16,114 |
) |
|
|
78,741 |
|
Other long-term liabilities |
|
|
257,313 |
|
|
|
10,390 |
|
|
|
267,703 |
|
Accumulated other
comprehensive loss |
|
|
(620 |
) |
|
|
(28,597 |
) |
|
|
(29,217 |
) |
Included in the table below are (a) amounts in accumulated other comprehensive loss at December 31,
2006 that have not been recognized in net periodic pension cost and (b) amounts expected to be
recognized in net periodic pension cost during 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amounts in |
|
|
|
|
| |
|
Accumulated Other |
|
|
|
|
| |
|
Comprehensive Loss at |
|
|
Expected To Be |
|
| |
|
December 31, 2006 |
|
|
Recognized in 2007 |
|
| |
|
Pretax |
|
|
After tax |
|
|
Pretax |
|
|
After tax |
|
| |
|
(In thousands) |
|
Unrecognized transition asset |
|
$ |
(68 |
) |
|
$ |
(43 |
) |
|
$ |
(48 |
) |
|
$ |
(31 |
) |
Unrecognized prior service cost |
|
|
17,633 |
|
|
|
11,278 |
|
|
|
2,208 |
|
|
|
1,413 |
|
Unrecognized net actuarial loss |
|
|
28,177 |
|
|
|
17,982 |
|
|
|
25,141 |
|
|
|
16,080 |
|
| |
|
|
|
|
|
|
$ |
45,742 |
|
|
$ |
29,217 |
|
|
$ |
27,301 |
|
|
$ |
17,462 |
|
| |
|
|
|
|
76
Components of Net Pension Cost
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Service cost |
|
$ |
2,894 |
|
|
$ |
2,632 |
|
|
$ |
1,585 |
|
Interest cost |
|
|
3,914 |
|
|
|
4,060 |
|
|
|
3,944 |
|
Expected return on plan assets |
|
|
(3,215 |
) |
|
|
(4,578 |
) |
|
|
(4,777 |
) |
Amortization of unrecognized transition asset |
|
|
(48 |
) |
|
|
(48 |
) |
|
|
(48 |
) |
Amortization of prior service cost |
|
|
1,962 |
|
|
|
1,962 |
|
|
|
1,962 |
|
Amortization of net loss |
|
|
1,393 |
|
|
|
994 |
|
|
|
709 |
|
Settlement loss |
|
|
7,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
14,826 |
|
|
$ |
5,022 |
|
|
$ |
3,375 |
|
|
|
|
|
|
|
|
|
|
|
The settlement loss of $7.9 million consisted of $7.4 million related to the terminated plan and
$0.5 million related to a non-qualified plan.
Disclosure Assumptions
For determining benefit obligations at year end:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
Weighted-average discount rate |
|
|
5.24 |
% |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
5.00 |
|
|
|
5.00 |
|
| |
For
determining net pension cost for the year:
|
|
|
|
|
|
|
|
|
| |
| |
|
2006 |
|
2005 |
|
2004 |
Discount rate |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
Weighted-average expected return on assets |
|
|
6.28 |
|
|
|
9.00 |
|
|
|
9.00 |
|
Rate of compensation increase |
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
The rate of compensation increase applies to two plans, because the other plans’ future benefits
are frozen. The expected long-term rate of return on plan assets in 2005 and 2004 is based on the
approximate weighted-average historical trend. As a result of the Company’s decision to terminate
one of its defined benefit pension plans in 2006, the Company liquidated the investments during the
year, and the expected long-term rate of return on the terminated plan was 6.2 percent. The
continuing plan’s long-term rate of return was 8.5 percent.
Plan Asset Allocation
The Company’s asset allocations by asset category are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
Cash and money market funds |
|
|
94 |
% |
|
|
1 |
% |
Equity securities |
|
|
4 |
|
|
|
69 |
|
Debt securities |
|
|
2 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Prior to the Company’s decision to terminate one of its defined benefit plans in 2006, its
77
investment strategy for its defined benefit plans took into consideration the fact that the
dominant plan was fully funded, and future benefit obligations were frozen for all participants.
The investment strategy reflected a long-term rather than short-term outlook and valued consistency
in its approach to asset mix. The investment portfolio was targeted toward 70 percent equity
investments and 30 percent fixed income and was rebalanced from time to time to approximate that
mix. After the decision to terminate the defined benefit pension plan, the assets related to that
plan were moved to money market funds. The Company’s prior strategy continues for the remaining
defined benefit plan. The asset allocation for the continuing plan was 70 percent equity and 30
percent fixed income at December 31, 2006.
Cash Flows
The expected benefit payments for the 10 years subsequent to December 31, 2006 are as follows: 2007
- $39.6 million; 2008 — $0.4 million; 2009 — $0.4 million; 2010
- $1.5 million; 2011 — $0.4 million; and 2012-2016 — $26.7 million.
The year 2007 includes the full settlement of the terminated qualified defined benefit pension
plan, with total payments of $33.3 million.
In 2007, the Company expects to contribute pension payments of approximately $6.2 million,
primarily due to the unfunded status of the non-qualified defined benefit pension plans.
Other Information
In addition to the benefit liabilities in the tables above, the Company has a supplemental
obligation to certain officers. The Company has committed to fund this obligation by releasing a
portion of the Company’s interest in the cash surrender values of split-dollar life insurance
arrangements to these officers upon retirement, if necessary. The Company’s share of the cash
surrender value of the policies was $35.4 million and $47.8 million at December 31, 2006 and 2005,
respectively. The balances were included in other long-term assets, except for $10.5 million
included in prepaid expenses and other assets at December 31, 2006. The Company’s obligation of
$18.2 million and $22.2 million at December 31, 2006 and 2005, respectively, was included in other
long-term liabilities, except for $3.5 million included in other accrued liabilities at December
31, 2006.
The Company maintains a savings program qualified under Section 401(k) of the Internal Revenue Code
and three non-qualified, deferred compensation programs. The Company contributes matching
contributions up to a maximum of 3 percent of the participant’s compensation, as defined in each
plan. The Company’s expense for these plans amounted to $17.7 million, $12.9 million and $11.9
million for the years ended December 31, 2006, 2005 and 2004, respectively. The expense has
increased due to higher earnings on the non-qualified, deferred compensation program and an
increase in the Company’s match on the qualified plan.
78
15. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31, 2006 of $29.2 million was based on the
adoption of Statement 158 on December 31, 2006, as explained in Note 14. The components of
accumulated other comprehensive loss only related to the Company’s defined benefit pension plans,
which are included in Note 14.
The components of other comprehensive income (loss) prior to adoption of Statement 158 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(In thousands) |
|
Minimum pension liability, net of tax (benefit)
of $202, $78 and $(35), respectively |
|
$ |
358 |
|
|
$ |
132 |
|
|
$ |
(67 |
) |
Amortization of derivative loss, net of tax
benefit of $$77 and $25, respectively |
|
|
|
|
|
|
117 |
|
|
|
37 |
|
Unrealized gain on investments, net of tax of $4 |
|
|
|
|
|
|
|
|
|
|
7 |
|
Reclassification adjustment for gains on
investments included in net income, net of
tax of $326 |
|
|
|
|
|
|
|
|
|
|
(542 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
358 |
|
|
$ |
249 |
|
|
$ |
(565 |
) |
|
|
|
|
|
|
|
|
|
|
79
16. Segment Information
The Company provides a range of health care services. The Company has two reportable operating
segments — long-term care, which includes the operation of skilled nursing and assisted living
facilities, and hospice and home health. The “Other” category includes the non-reportable segments
and corporate items. The revenues in the Other category include services for rehabilitation and
other services. Asset information, including capital expenditures, is not reported by segment by
the Company.
The accounting policies of the operating segments are the same as those described in the summary of
significant accounting policies (see Note 1). The Company evaluates performance and allocates
resources based on operating margin, which represents revenues less operating expenses. The
operating margin does not include general and administrative expenses, depreciation and
amortization, asset impairment, other income and expense items, and income taxes.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Long-Term |
|
Hospice and |
|
|
|
|
| |
|
Care |
|
Home Health |
|
Other |
|
Total |
| |
|
(In thousands) |
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
3,009,045 |
|
|
$ |
479,262 |
|
|
$ |
124,878 |
|
|
$ |
3,613,185 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
116,563 |
|
|
|
116,563 |
|
Depreciation and amortization |
|
|
137,636 |
|
|
|
3,256 |
|
|
|
4,487 |
|
|
|
145,379 |
|
Operating margin |
|
|
560,523 |
|
|
|
73,377 |
|
|
|
9,398 |
|
|
|
643,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
2,893,900 |
|
|
$ |
394,804 |
|
|
$ |
128,586 |
|
|
$ |
3,417,290 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
103,717 |
|
|
|
103,717 |
|
Depreciation and amortization |
|
|
130,558 |
|
|
|
3,104 |
|
|
|
5,541 |
|
|
|
139,203 |
|
Operating margin |
|
|
520,545 |
|
|
|
60,993 |
|
|
|
15,321 |
|
|
|
596,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
2,708,201 |
|
|
$ |
383,869 |
|
|
$ |
116,797 |
|
|
$ |
3,208,867 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
69,142 |
|
|
|
69,142 |
|
Depreciation and amortization |
|
|
121,210 |
|
|
|
2,979 |
|
|
|
3,632 |
|
|
|
127,821 |
|
Operating margin |
|
|
479,858 |
|
|
|
71,145 |
|
|
|
10,015 |
|
|
|
561,018 |
|
80
Manor Care, Inc.
Supplementary Data (Unaudited)
Summary of Quarterly Results
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, 2006 |
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
| |
|
(In thousands, except per share amounts) |
Revenues |
|
$ |
869,295 |
|
|
$ |
894,214 |
|
|
$ |
915,515 |
|
|
$ |
934,161 |
|
|
$ |
3,613,185 |
|
Income before other income (expenses)
and income taxes |
|
|
47,256 |
|
|
|
78,170 |
|
|
|
80,851 |
|
|
|
84,944 |
|
|
|
291,221 |
|
Income before cumulative effect |
|
|
27,005 |
|
|
|
45,551 |
|
|
|
46,502 |
|
|
|
50,502 |
|
|
|
169,560 |
|
Net income |
|
|
24,529 |
|
|
|
45,551 |
|
|
|
46,502 |
|
|
|
50,502 |
|
|
|
167,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Income before
cumulative effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.34 |
|
|
$ |
.60 |
|
|
$ |
.63 |
|
|
$ |
.69 |
|
|
$ |
2.24 |
|
Diluted |
|
$ |
.33 |
|
|
$ |
.58 |
|
|
$ |
.60 |
|
|
$ |
.66 |
|
|
$ |
2.17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, 2005 |
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
| |
|
(In thousands, except per share amounts) |
Revenues |
|
$ |
879,202 |
|
|
$ |
833,759 |
|
|
$ |
840,279 |
|
|
$ |
864,050 |
|
|
$ |
3,417,290 |
|
Income before other income (expenses)
and income taxes |
|
|
75,339 |
|
|
|
63,229 |
|
|
|
75,409 |
|
|
|
77,039 |
|
|
|
291,016 |
|
Net income |
|
|
40,363 |
|
|
|
38,079 |
|
|
|
50,187 |
|
|
|
32,326 |
|
|
|
160,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.47 |
|
|
$ |
.44 |
|
|
$ |
.61 |
|
|
$ |
.41 |
|
|
$ |
1.93 |
|
Diluted |
|
$ |
.46 |
|
|
$ |
.43 |
|
|
$ |
.60 |
|
|
$ |
.40 |
|
|
$ |
1.89 |
|
In the first quarter of 2006, the Company recorded expense of $11.1 million ($7.0 million
after tax) related to the asset impairment of its medical transcription business, which was
decreased by $0.3 million in the fourth quarter. The Company also recorded higher than normal
stock-based compensation and deferred compensation expense in the first quarter of 2006 of $11.3
million ($7.2 million after tax). In the fourth quarter of 2006, the Company recorded a non-cash
charge of $8.9 million ($5.7 million after tax) related to the termination of a previously frozen
defined benefit pension plan. As a result of improving trends, the Company also made a reduction
to its general and professional liability costs by $4.4 million ($2.8 million after tax) in the
fourth quarter that related to prior quarters.
In the second quarter of 2005, the Company completed its assessment of the accounting for its
leases and leasehold improvements and recorded a non-cash charge of $4.5 million ($2.8 million
after tax). In the third quarter of 2005, the Company recorded a gain of $17.6 million ($11.0
million after tax) on the sale of three facilities. The gain was partially offset by expenses of
$4.1 million ($2.5 million after tax) related to the early extinguishment of debt and $2.5 million
($1.5 million after tax) related to an asset impairment. In the fourth quarter of 2005, the
Company recorded expense of $14.6 million ($9.1 million after tax) related to the early
extinguishment of debt.
See the consolidated financial statements or Management’s Discussion and Analysis for further
discussion of these items.
81
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management,
including the chief executive officer, or CEO, and chief financial officer, or CFO, of the
effectiveness of the design and operation of our disclosure procedures. Based on that evaluation,
our management, including the CEO and CFO, concluded that our disclosure controls and procedures
were effective as of December 31, 2006.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting in the fourth quarter of
2006 that materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
82
Management’s Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
| |
(1) |
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company; |
| |
| |
(2) |
|
Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and |
| |
| |
(3) |
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect
on the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk. Management is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control-Integrated
Framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission to evaluate the effectiveness of the Company’s internal control over financial
reporting. Management has concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2006. Ernst & Young LLP has issued an attestation report on
management’s assessment of the Company’s internal control over financial reporting.
| |
|
|
|
|
|
|
/s/ Paul A. Ormond
|
|
|
|
/s/ Steven M. Cavanaugh
|
|
|
|
|
|
|
|
|
|
|
Paul A. Ormond
|
|
|
|
Steven M. Cavanaugh |
|
|
Chairman, President
|
|
|
|
Vice President and |
|
|
and Chief Executive Officer
|
|
|
|
Chief Financial Officer |
|
|
83
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Manor Care, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, that Manor Care, Inc. maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Manor Care, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Manor Care, Inc. maintained effective internal control
over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based
on the COSO criteria. Also, in our opinion, Manor Care, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Manor Care, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity
and cash flows for each of the three years in the period ended December 31, 2006 and our report
dated January 30, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Toledo, Ohio
January 30, 2007
84
Item 9B. Other Information
Amendment of Bylaws and Corporate Governance Guidelines
Effective
February 20, 2007, the Board of Directors approved amendments to Article III, Section I,
of the Company’s bylaws to change the vote standard for the election of directors from plurality to
a majority of votes cast in uncontested elections. A majority of the votes cast means that the
number of shares voted “for” a director must exceed the number of votes cast “against” that
director. In contested elections where the number of nominees exceeds the number of directors to
be elected, directors will continue to be elected by the vote of a plurality of the shares
represented in person or by proxy and entitled to vote on the election of directors.
Also
effective February 20, 2007, the Board of Directors approved amendments to Section 12 of the
Company’s corporate governance guidelines to provide that if a nominee for director does not
receive a majority of the votes cast for that director, the director shall offer to tender his or
her resignation to the Board. The Governance Committee will make a recommendation to the Board on
whether to accept or reject the resignation, or whether other action should be taken. The Board
will act on the Governance Committee’s recommendation and publicly disclose its decision and the
rationale behind it within 90 days from the date of certification of the election results. The
director who tenders his or her resignation will not participate in the Board’s decision.
The amended and restated bylaws are attached as Exhibit 3.2 to this Annual Report on Form 10-K.
The amended Corporate Governance Guidelines have been posted on the Company’s internet website at
www.hcr-manorcare.com/investor/governanceguide.asp.
Modification of Employment Agreement of Stephen L. Guillard
On
February 20, 2007, with the consent of its Compensation Committee, the Company
modified the May 16, 2005, Employment Agreement of its Executive Vice President and Chief Operating
Officer Stephen L. Guillard to increase from two to three years the salary (and bonus, if following
a change in control) payments to be made by the Company in the event of a termination of his
employment by the Company without cause or upon his death or disability, and to increase from two
to three years following his termination of employment for any reason Mr. Guillard’s covenants
regarding noncompetition with the Company and nonsolicitation of the Company’s customers and
employees. A copy of the Amendment No. 1 to Employment Agreement is filed as Exhibit 10.35 to this
Annual Report on Form 10-K.
85
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
We incorporate by reference the information on our directors in our Proxy Statement, which we will
file pursuant to Regulation 14A with the SEC by April 30, 2007.
Executive Officers
See the “Executive Officers of the Registrant” section on pages 7-8 under Item 1, Business, for the
names, ages, offices and positions held during the last five years of each of our executive
officers.
Audit Committee and Audit Committee Financial Expert
We incorporate by reference the information on our audit committee and audit committee financial
expert in our Proxy Statement, which we will file with the SEC by April 30, 2007.
Section 16(a) Compliance
We incorporate by reference the information on our Section 16(a) compliance in our Proxy Statement,
which we will file with the SEC by April 30, 2007.
Code of Ethics
We incorporate by reference the information on our Code of Ethics in our Proxy Statement, which we
will file with the SEC by April 30, 2007. We intend to satisfy the disclosure requirement
regarding any amendment to, or a waiver of, a provision of the Code of Ethics for
our chief executive officer, chief financial officer, controller or persons performing similar
functions by posting such information to our website (www.hcr-manorcare.com).
Item 11. Executive Compensation
We incorporate by reference information on executive compensation in our Proxy Statement,
which we will file with the SEC by April 30, 2007.
86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
We incorporate by reference information on security ownership of certain beneficial owners and
management in our Proxy Statement, which we will file with the SEC by April 30, 2007.
The following table provides information as of December 31, 2006 concerning our common stock that
may be issued upon the exercise of options under all of our existing approved equity compensation
plans.
| |
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| |
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|
|
|
|
|
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|
(c) |
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
| |
|
(a) |
|
|
|
|
|
|
Remaining Available |
|
| |
|
Number of Securities |
|
|
(b) |
|
|
for Future Issuance |
|
| |
|
to be Issued Upon |
|
|
Weighted-Average |
|
|
Under Equity |
|
| |
|
Exercise of |
|
|
Exercise Price of |
|
|
Compensation Plans |
|
| |
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
(Excluding Securities |
|
| Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Reflected in Column (a)) |
|
Equity
compensation plans
approved by
security holders |
|
|
3,604,088 |
(1) |
|
$ |
32.30 |
|
|
|
4,779,125 |
(2) |
Equity compensation
plans not approved
by security holders |
|
|
— |
|
|
|
— |
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|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,604,088 |
|
|
$ |
32.30 |
|
|
|
4,779,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
This number includes options outstanding at December 31, 2006 under our Equity
Incentive Plan, Amended Stock Option Plan for Key Employees and Stock Option Plan for Outside
Directors. There are no outstanding warrants or rights. In addition to the options in the
table above, there are 270,014 restricted stock units including associated dividend
equivalents outstanding at December 31, 2006 which generally vest one third on the third,
fourth and fifth anniversary of the grant date. Each unit is equal to one share of common
stock which will be issued upon vesting. |
| |
| (2) |
|
The number of securities remaining available for future issuance under our
Equity Incentive Plan includes a total of 4,779,125 securities which may be awarded as
options, stock appreciation rights, restricted stock or restricted stock units, provided that
restricted stock or units shall not exceed 2,636,872 shares. The number of securities
available for future issuance excludes the options in the table and restricted stock units
discussed in footnote 1. Awards of performance-vested restricted stock for 2007 and 2008
contingent upon the achievement of certain performance-based criteria for each year have not
been deducted from the total available. The target amount of the performance awards total
102,166 shares for 2007 and 2008 but could be higher, lower or even zero. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
We incorporate by reference information on certain relationships and related transactions, and
director independence in our Proxy Statement, which we will file with the SEC by April 30, 2007.
87
Item 14. Principal Accounting Fees and Services
We incorporate by reference information on Ernst & Young LLP’s fees and services in our Proxy
Statement, which we will file with the SEC by April 30, 2007.
PART IV
Item 15. Exhibits, Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
Manor Care filed the following consolidated financial statements of Manor Care, Inc. and
subsidiaries as part of this Form 10-K in Item 8 on the pages indicated:
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Page |
|
Report of Independent Registered Public Accounting Firm |
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43 |
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Consolidated Balance Sheets — December 31, 2006 and 2005 |
|
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44 |
|
Consolidated
Statements of Income - Years ended December 31, 2006, 2005 and 2004 |
|
|
45 |
|
Consolidated Statements of Cash Flows -
Years ended December 31, 2006, 2005 and 2004 |
|
|
46 |
|
Consolidated Statements of Shareholders’ Equity -
Years ended December 31, 2006, 2005 and 2004 |
|
|
47 |
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Notes to Consolidated Financial Statements — December 31, 2006 |
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48 |
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Manor Care includes the following consolidated financial statement schedule of Manor Care, Inc. and
subsidiaries in this Form 10-K on page 89:
Schedule II — Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
88
Manor Care, Inc.
Schedule II — Valuation and Qualifying Accounts
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Charged |
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|
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|
|
|
|
| |
|
Balance at |
|
|
to Costs |
|
|
Deduc- |
|
|
Balance |
|
| |
|
Beginning |
|
|
and |
|
|
tions |
|
|
at End of |
|
| |
|
of Period |
|
|
Expenses |
|
|
(Note 1) |
|
|
Period |
|
| |
|
(In thousands) |
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
60,726 |
|
|
$ |
59,334 |
|
|
$ |
(45,416 |
) |
|
$ |
74,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
Year ended December 31, 2005: |
|
|
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|
|
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|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
54,532 |
|
|
$ |
34,505 |
|
|
$ |
(28,311 |
) |
|
$ |
60,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
60,652 |
|
|
$ |
29,974 |
|
|
$ |
(36,094 |
) |
|
$ |
54,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Uncollectible accounts written off, net of recoveries. |
89
Exhibits
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| S-K Item 601 |
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| No. |
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Document |
2.1
|
|
—
|
|
Amended and Restated Agreement and Plan of Merger, dated as of June 10, 1998, by and among Manor Care, Inc.,
Catera Acquisition Corp. and the Registrant (filed as Annex A to Health Care and Retirement Corporation’s
(HCR) Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference) |
|
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|
|
|
3.1
|
|
—
|
|
Certificate of Incorporation including all amendments (filed as Exhibit 3.1 to Manor Care, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference) |
|
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|
*3.2
|
|
—
|
|
Amended and Restated By-laws of Manor Care, Inc. |
|
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|
4.1
|
|
—
|
|
Indenture for 6.25% Senior Notes due 2013, dated as of April 15, 2003, among Manor Care, Inc., the subsidiary
guarantors as named therein and National City Bank, as trustee (filed as Exhibit 4.1 to Manor Care, Inc.’s
Registration Statement on Form S-4, File No. 333-107399 and incorporated herein by reference) |
|
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|
|
4.2
|
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—
|
|
Indenture for 2.125% Convertible Senior Notes due 2023, dated as of April 15, 2003, among Manor Care, Inc.,
the subsidiary guarantors as named therein and National City Bank, as trustee (filed as Exhibit 4.1 to Manor
Care, Inc.’s Registration Statement on Form S-3, File No. 333-107481 and incorporated herein by reference) |
|
|
|
|
|
4.3
|
|
—
|
|
Amendment to Indenture for 2.125% Convertible Senior Notes due 2023, dated as of August 7, 2003, among Manor
Care, Inc., the subsidiary guarantors as named therein and National City Bank, as trustee (filed as Exhibit
4.4 to Manor Care, Inc.’s Registration Statement for Amendment No. 1 to Form S-3, File No. 333-107481 and
incorporated herein by reference) |
|
|
|
|
|
4.4
|
|
—
|
|
Form of Indenture for 2.125% Convertible Senior Notes due 2023 (“New Notes”), dated as of December 2004,
among Manor Care, Inc., the subsidiary guarantors parties hereto and U.S. Bank Trust National Association, as
trustee (filed as Exhibit T3C to Manor Care, Inc.’s Form T-3 filed on November 23, 2004 and incorporated
herein by reference) |
|
|
|
|
|
4.5
|
|
—
|
|
Indenture for 2.125% Convertible Senior Notes due 2035, dated as of August 1, 2005, among Manor Care, Inc.,
the subsidiary guarantors as named therein and Wachovia Bank, National Association, as trustee (filed as
Exhibit 4.1 to Manor Care, Inc.’s Form 8-K filed on August 1, 2005 and incorporated herein by reference) |
|
|
|
|
|
4.6
|
|
—
|
|
Registration Rights Agreement, dated August 1, 2005, among Manor Care, Inc., the Guarantors and the Initial
Purchasers named therein (filed as Exhibit 4.3 to Manor Care, Inc.’s Form 8-K filed on August 1, 2005 and
incorporated herein by reference) |
|
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|
|
|
4.7
|
|
—
|
|
Indenture for 2.0% Convertible Senior Notes due 2036, dated as of May 17, 2006, among Manor Care, Inc., the
Subsidiary Guarantors and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to Manor Care,
Inc.’s Form 8-K filed on May 17, 2006 and incorporated herein by reference) |
|
|
|
|
|
4.8
|
|
—
|
|
Registration Rights Agreement, dated May 17, 2006, among Manor Care, Inc., the Guarantors and the Initial
Purchasers named therein (filed as Exhibit 4.3 to Manor Care, Inc.’s Form 8-K filed on May 17, 2006 and
incorporated herein by reference) |
90
| |
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| S-K Item 601 |
|
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| No. |
|
|
|
Document |
4.9
|
|
—
|
|
Credit Agreement dated as of May 27, 2005 among Manor Care, Inc., as the Borrower, JPMorgan Chase Bank, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer, and The Other Lenders Party Hereto (filed as
Exhibit 4.1 to Manor Care, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005
and incorporated herein by reference) |
|
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|
|
|
4.10
|
|
—
|
|
First Amendment, dated as of August 3, 2005, to the Credit Agreement, dated as of May 27, 2005, among Manor
Care, Inc., as Borrower, and the Lenders parties thereto (filed as Exhibit 4.2 to Manor Care, Inc.’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 and incorporated herein by
reference) |
|
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|
|
4.11
|
|
—
|
|
Second Amendment, dated as of June 22, 2006, to the Credit Agreement dated as of May 27, 2005 (as amended by
the First Amendment, dated as of August 3, 2005), among Manor Care, Inc., as the Borrower, and the lenders
party thereto (filed as Exhibit 4.1 to Manor Care, Inc.’s Form 8-K filed on June 23, 2006 and incorporated
herein by reference) |
|
|
|
|
|
4.12
|
|
—
|
|
Specimen certificate representing the Common Stock of Manor Care, Inc. (filed as Exhibit 4.6 to Manor Care,
Inc.’s Registration Statement on Form S-3, File No. 333-129107 and incorporated herein by reference) |
|
|
|
|
|
10.1
|
|
—
|
|
Stock Purchase Agreement and amendment among HCR, HCRC Inc., O-I Health Care Holding Corp. and
Owens-Illinois, Inc. dated as of August 30, 1991 (filed as Exhibit 10.1 and 10.1(a) to HCR’s Registration
Statement on Form S-1, File No. 33-42535 and incorporated herein by reference) |
|
|
|
|
|
10.2
|
|
—
|
|
Form of Annual Incentive Award Plan (filed as Exhibit 10.2 to HCR’s Registration Statement on Form S-1, File
No. 33-42535 and incorporated herein by reference) |
|
|
|
|
|
10.3
|
|
—
|
|
Manor Care, Inc. Performance Award Plan (filed as Appendix A to Manor Care, Inc.’s Proxy Statement filed
April 11, 2005 in connection with its Annual Meeting held on May 10, 2005 and incorporated herein by
reference) |
|
|
|
|
|
10.4
|
|
—
|
|
Amendment and Restatement of the Equity Incentive Plan (filed as Appendix B to Manor Care, Inc.’s Proxy
Statement filed April 7, 2004 in connection with its Annual Meeting held on May 5, 2004 and incorporated
herein by reference) |
|
|
|
|
|
10.5
|
|
—
|
|
First Amendment to the Amendment and Restatement of the Equity Incentive Plan (filed as Exhibit 10.2 to Manor
Care, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by
reference) |
|
|
|
|
|
10.6
|
|
—
|
|
Second Amendment to the Amendment and Restatement of the Equity Incentive Plan (filed as Exhibit 10.1 to
Manor Care, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated
herein by reference) |
|
|
|
|
|
*10.7
|
|
—
|
|
Third Amendment to the Amendment and Restatement of the Equity Incentive Plan |
|
|
|
|
|
10.8
|
|
—
|
|
Form of Non-Qualified Stock Option Agreement between Manor Care, Inc. and certain officers participating in
the Equity Incentive Plan (filed as Exhibit 10.6 to Manor Care, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2004 and incorporated herein by reference) |
|
|
|
|
|
10.9
|
|
—
|
|
Form of Restricted Stock Agreement between Manor Care, Inc. and certain officers participating in the Equity
Incentive Plan (filed as Exhibit 10.7 to Manor Care, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference) |
|
|
|
|
|
*10.10
|
|
—
|
|
Form of Restricted Stock Agreement between Manor Care, Inc. and certain officers participating in the
Amendment and Restatement of the Equity Incentive Plan |
91
| |
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|
|
| S-K Item 601 |
|
|
|
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| No. |
|
|
|
Document |
10.11
|
|
—
|
|
Form of Non-Qualified Stock Option Agreement between Manor Care, Inc. and certain outside directors
participating in the Equity Incentive Plan (filed as Exhibit 10.8 to Manor Care, Inc.’s Annual Report on Form
10-K for the year ended December 31, 2004 and incorporated herein by reference) |
|
|
|
|
|
10.12
|
|
—
|
|
Form of Restricted Stock Agreement between Manor Care, Inc. and certain outside directors participating in
the Equity Incentive Plan (filed as Exhibit 10.9 to Manor Care, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2004 and incorporated herein by reference) |
|
|
|
|
|
10.13
|
|
—
|
|
Form of Restricted Stock Unit Award Agreement between Manor Care, Inc. and certain officers and key employees
participating in the Equity Incentive Plan (filed as Exhibit 10.11 to Manor Care, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) |
|
|
|
|
|
10.14
|
|
—
|
|
Amended Stock Option Plan for Key Employees (filed as Exhibit 4 to HCR’s Registration Statement on Form S-8,
File No. 33-83324 and incorporated herein by reference) |
|
|
|
|
|
10.15
|
|
—
|
|
First Amendment, Second Amendment and Third Amendment to the Amended Stock Option Plan for Key Employees
(filed as Exhibits 4.1, 4.2 and 4.3, respectively, to HCR’s Registration Statement on Form S-8, File No.
333-64181 and incorporated herein by reference) |
|
|
|
|
|
10.16
|
|
—
|
|
Fourth Amendment and Fifth Amendment to the Amended Stock Option Plan for Key Employees (filed on pages B1-B2
of Manor Care, Inc.’s Proxy Statement dated April 6, 2001 in connection with its Annual Meeting held on May
8, 2001 and incorporated herein by reference) |
|
|
|
|
|
10.17
|
|
—
|
|
Revised form of Non-Qualified Stock Option Agreement between HCR and various Key Employees participating in
the Stock Option Plan for Key Employees (filed as Exhibit 4.7 to HCR’s Registration Statement on Form S-8,
File No.33-48885 and incorporated herein by reference) |
|
|
|
|
|
10.18
|
|
—
|
|
Amended Restricted Stock Plan (filed on pages A1 to A9 of HCR’s Proxy Statement dated March 25, 1997 in
connection with its Annual Meeting held on May 6, 1997 and incorporated herein by reference) |
|
|
|
|
|
10.19
|
|
—
|
|
First Amendment to Amended Restricted Stock Plan (filed as Exhibit 4.2 to HCR’s Registration Statement on
Form S-8, File No. 333-64235 and incorporated herein by reference) |
|
|
|
|
|
10.20
|
|
—
|
|
Revised form of Restricted Stock Plan Agreement between Manor Care, Inc. and
officers participating in the Amended Restricted Stock Plan (filed as Exhibit 10.9 to Manor
Care, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference) |
|
|
|
|
|
10.21
|
|
—
|
|
Form of Indemnification Agreement between HCR and various officers and directors
(filed as Exhibit 10.9 to HCR’s Registration Statement on Form S-1, File No. 33-42535 and
incorporated herein by reference) |
|
|
|
|
|
10.22
|
|
—
|
|
HCR Manor Care Senior Executive Retirement Plan, effective October 1, 1992,
restated January 1, 2001 (filed as Exhibit 10.13 to Manor Care, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2001 and incorporated herein by reference) |
92
| |
|
|
|
|
| S-K Item 601 |
|
|
|
|
| No. |
|
|
|
Document |
10.23
|
|
—
|
|
HCR Manor Care Senior Management Savings Plan for Corporate Officers, amended and
restated as of February 11, 2004 (filed as Exhibit 10.1 to Manor Care, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by
reference) |
|
|
|
|
|
10.24
|
|
—
|
|
Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and Paul A. Ormond (filed as Exhibit 10.14 to Manor
Care, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference) |
|
|
|
|
|
10.25
|
|
—
|
|
Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and M. Keith Weikel (filed as Exhibit 10.15 to Manor
Care, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference) |
|
|
|
|
|
10.26
|
|
—
|
|
Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and Geoffrey G. Meyers (filed as Exhibit 10.16 to
Manor Care, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference) |
|
|
|
|
|
10.27
|
|
—
|
|
Form of Severance Agreement between HCR Manor Care, Inc.,
HCRA and R. Jeffrey Bixler (filed as Exhibit 10.17 to
Manor Care, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference) |
|
|
|
|
|
10.28
|
|
—
|
|
Form of First Amendment to Severance Agreement by and
between, Manor Care, Inc., Heartland Employment Services,
Inc., Health Care and Retirement Corporation of America
and certain executive officers (M. Keith Weikel, Geoffrey
G. Meyers and R. Jeffrey Bixler), effective December 16,
2003 (filed as Exhibit 10.22 to Manor Care, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2003
and incorporated herein by reference) |
|
|
|
|
|
10.29
|
|
—
|
|
Agreement by and between Manor Care, Inc., Heartland
Employment Services, Inc., Health Care and Retirement
Corporation of America and Paul A. Ormond, effective
August 20, 2004 (filed as Exhibit 10.1 to Manor Care,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by reference) |
|
|
|
|
|
10.30
|
|
—
|
|
Agreement by and between Manor Care, Inc., Heartland
Employment Services, Inc., Health Care and Retirement
Corporation of America and Trustee, effective August 20,
2004 (filed as Exhibit 10.2 to Manor Care, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by reference) |
|
|
|
|
|
10.31
|
|
—
|
|
Agreement by and between Manor Care, Inc. and Paul A.
Ormond, effective August 20, 2004 (filed as Exhibit 10.3
to Manor Care, Inc.’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 and incorporated
herein by reference) |
|
|
|
|
|
10.32
|
|
—
|
|
Form of Split Dollar Assignment Termination Agreement by
and between Health Care and Retirement Corporation of
America, Manor Care, Inc., Heartland Employment Services,
Inc., Trustee, and certain executive officers (Paul A.
Ormond and M. Keith Weikel), effective December 16, 2003
(filed as Exhibit 10.4 to Manor Care, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference) |
|
|
|
|
|
10.33
|
|
—
|
|
Form of Split Dollar Assignment Termination Agreement by
and between Health Care and Retirement Corporation of
America, Manor Care, Inc., Heartland Employment Services,
Inc., and remaining executive officers, effective December
16, 2003 (filed as Exhibit 10.5 to Manor Care, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 and incorporated herein by reference) |
93
| |
|
|
|
|
| S-K Item 601 |
|
|
|
|
| No. |
|
|
|
Document |
10.34
|
|
—
|
|
Form of Employment Agreement by and among Stephen L.
Guillard, Heartland Employment Services, LLC, and Manor
Care, Inc. (filed as Exhibit 10.32 to Manor Care, Inc.’s
Annual Report on Form 10-K for the year ended December 31,
2005 and incorporated herein by reference) |
|
|
|
|
|
*10.35
|
|
—
|
|
Amendment No. 1 to Employment Agreement between Stephen L.
Guillard, Heartland Employment Services, LLC, and Manor
Care, Inc. |
|
|
|
|
|
10.36
|
|
—
|
|
Form of Employment Agreement by and
among Steven M. Cavanaugh, Heartland Employment Services, LLC, and
Manor Care, Inc. (filed as Exhibit 10.1 to Manor Care, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006
and incorporated herein by reference)
|
|
|
|
|
|
10.37
|
|
—
|
|
Form of Employment Agreement between Health Care and
Retirement Corporation of America and remaining executive
officers (filed as Exhibit 10.20 to Manor Care, Inc.’s
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference) |
|
|
|
|
|
10.38
|
|
—
|
|
Form of First Amendment to Employment Agreement by and
between Manor Care, Inc., Heartland Employment Services,
Inc., Health Care and Retirement Corporation of America
and remaining executive officers, effective December 16,
2003 (filed as Exhibit 10.21 to Manor Care, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2003
and incorporated herein by reference) |
|
|
|
|
|
10.39
|
|
—
|
|
Stock Option Plan for Outside Directors (filed as Exhibit
4.4 to HCR’s Registration Statement on Form S-8, File No.
33-48885 and incorporated herein by reference) |
|
|
|
|
|
10.40
|
|
—
|
|
First Amendment, Second Amendment and Third Amendment to
the Stock Option Plan for Outside Directors (filed as
Exhibits 4.4, 4.5 and 4.6, respectively, to HCR’s
Registration Statement on Form S-8, File No. 333-64181 and
incorporated herein by reference) |
|
|
|
|
|
10.41
|
|
—
|
|
Form of Non-Qualified Stock Option Agreement between HCR
and various outside directors participating in the Stock
Option Plan for Outside Directors (filed as Exhibit 4.6 to
HCR’s Registration Statement on Form S-8, File No.
33-48885 and incorporated herein by reference) |
|
|
|
|
|
10.42
|
|
—
|
|
Health Care and Retirement Corporation Deferred
Compensation Plan for Outside Directors adopted December
8, 1992 (filed as Exhibit 10.26 to Manor Care, Inc.’s
Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference) |
|
|
|
|
|
10.43
|
|
—
|
|
Manor Care, Inc.’s Non-Employee Director Stock
Compensation Plan (filed as Exhibit A to Manor Care of
America, Inc.’s (formerly known as Manor Care, Inc.) Proxy
Statement dated August 28, 1996 which is Exhibit 99 to the
Annual Report on Form 10-K for the year ended May 31, 1997
and incorporated herein by reference) |
|
|
|
|
|
10.44
|
|
—
|
|
Non-Management Director Compensation, effective February
1, 2005 (filed as Exhibit 10.37 to Manor Care, Inc.’s
Annual Report on Form 10-K for the year ended December 31,
2004 and incorporated herein by reference) |
|
|
|
|
|
*21
|
|
—
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
*23
|
|
—
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
|
|
*31.1
|
|
—
|
|
Chief Executive Officer Certification |
|
|
|
|
|
*31.2
|
|
—
|
|
Chief Financial Officer Certification |
|
|
|
|
|
*32.1
|
|
—
|
|
Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
94
| |
|
|
|
|
| S-K Item 601 |
|
|
|
|
| No. |
|
|
|
Document |
*32.2
|
|
—
|
|
Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
99.1
|
|
—
|
|
Purchase Agreement, dated July 26, 2005, among Manor Care,
Inc., the Subsidiary Guarantors and the Initial Purchasers
named therein (filed as Exhibit 99.1 to Manor Care, Inc.’s
Form 8-K filed on August 1, 2005 and incorporated herein
by reference) |
|
|
|
|
|
99.2
|
|
—
|
|
Warrant Agreement, dated July 26, 2005, between Manor
Care, Inc. and J.P. Morgan Securities Inc., as agent for
JPMorgan Chase Bank, National Association (filed as
Exhibit 99.2 to Manor Care, Inc.’s Form 8-K filed on
August 1, 2005 and incorporated herein by reference) |
|
|
|
|
|
99.3
|
|
—
|
|
Call Option Agreement, dated July 26, 2005, between Manor
Care, Inc. and J.P. Morgan Securities Inc., as agent for
JPMorgan Chase Bank, National Association (filed as
Exhibit 99.3 to Manor Care, Inc.’s Form 8-K filed on
August 1, 2005 and incorporated herein by reference) |
|
|
|
|
|
99.4
|
|
—
|
|
Accelerated Share Repurchase Agreement, dated August 11,
2005, among Manor Care, Inc. and J.P. Morgan Securities,
Inc., as agent for JPMorgan Chase Bank, National
Association, London Branch (filed as Exhibit 99.1 to Manor
Care, Inc.’s Form 8-K filed on August 12, 2005 and
incorporated herein by reference) |
|
|
|
|
|
99.5
|
|
—
|
|
Purchase Agreement, dated May 11, 2006, among Manor Care,
Inc., the Subsidiary Guarantors and the Initial Purchasers
named therein (filed as Exhibit 99.1 to Manor Care, Inc.’s
Form 8-K filed on May 17, 2006 and incorporated herein by
reference) |
|
|
|
|
|
99.6
|
|
—
|
|
Accelerated Share Repurchase Agreement, dated May 25,
2006, among Manor Care, Inc. and Merrill Lynch Financial
Markets, Inc. (filed as Exhibit 99.1 to Manor Care, Inc.’s
Form 8-K filed on May 26, 2006 and incorporated herein by
reference) |
95
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
|
|
| |
|
Manor Care, Inc. |
|
|
| |
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
by
|
|
/s/ Richard A. Parr II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Parr II |
|
|
|
|
|
|
Vice President, General Counsel and Secretary |
|
|
Date:
February 21, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on February 21, 2007 on behalf of Manor Care, Inc. and in the
capacities indicated.
| |
|
|
| Signature |
|
Title |
| |
/s/ Mary Taylor Behrens
|
|
Director |
|
|
|
|
|
|
/s/ Steven M. Cavanaugh
|
|
Vice President and Chief Financial Officer (Principal Financial Officer) |
|
|
|
|
|
|
/s/ Joseph F. Damico
|
|
Director |
|
|
|
|
|
|
/s/ Stephen L. Guillard
|
|
Executive Vice President and Chief Operating Officer; Director |
|
|
|
|
|
|
/s/ William H. Longfield
|
|
Director |
|
|
|
|
|
|
/s/ Spencer C. Moler
|
|
Vice President and Controller (Principal Accounting Officer) |
|
|
|
96
| |
|
|
| Signature |
|
Title |
| |
/s/ Paul A. Ormond
|
|
Chairman of the Board and Director; President and Chief Executive |
|
|
Officer (Principal Executive Officer) |
|
|
|
/s/ John T. Schwieters
|
|
Director |
|
|
|
|
|
|
/s/ Richard C. Tuttle
|
|
Director |
|
|
|
|
|
|
/s/ Gail R. Wilensky
|
|
Director |
|
|
|
|
|
|
/s/ Thomas L. Young
|
|
Director |
|
|
|
97
Exhibit Index
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
3.2
|
|
Amended and Restated By-laws of Manor Care, Inc. |
|
|
|
10.7
|
|
Third Amendment to the Amendment and Restatement of the Equity Incentive Plan |
|
|
|
10.10
|
|
Form of Restricted Stock Agreement between Manor Care, Inc. and certain
officers participating in the Amendment and Restatement of the Equity Incentive Plan |
|
|
|
10.35
|
|
Amendment No. 1 to Employment Agreement between Stephen L. Guillard, Heartland
Employment Services, LLC, and Manor Care, Inc. |
|
|
|
21
|
|
Subsidiaries of the Registrant |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
31.1
|
|
Chief Executive Officer Certification |
|
|
|
31.2
|
|
Chief Financial Officer Certification |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
98